I know this is not your usual area of expression, but may I ask for your sense of what should be done?

Before answering, it might be interesting to note that a few hours ago, I learned that in Athens, sales of heating fuel and natural gas to heat people's homes has fallen 80% (yes eighty) since last year.

As far as what should be done, my suggestions are as follows:

ensure that money loaned to Greece is accounted for - have strict controls on it, no matter how many howls of protest there may be by the Greek government that national sovereignty is being infringed upon

focus on growth - too much austerity is not helping - there is enough evidence for this already

give it time - two, even more additional years, if necessary - even if it means additional compromises by Greece's creditors

That 80% decline in heating fuel is a powerful number full of human meaning , , ,

What would be the best way to focus on growth?

Yes it is. Of myself and my three students/training partners, three of us (including myself) are making do without heat. So far its not been really cold, but it certainly makes one feel that things are indeed hitting "close to home"

I do not know what the best way would be to focus on growth. But I do feel that the well-off are not only more insulated, but are not being made to pay their fair share. By well-off I do not mean people who are doctors or layers, I mean people whose families are connected to some member of parliament, or to some rich business or media personality.

Also, I do not mean that the rich should be taxed so as to kill incentive for business growth. But there continue to be tax evaders who are not pursued. As I noted before, the Lagarde list was handed to Greek authorities over a year ago, and some minister I believe resigned exactly because it was being hushed up. Then there is the famous singer Tolis Voskopoulos who owes 5 million euro in back taxes and has not payed - in part because his beautiful wife is an MP.

Now getting the rich tax evaders to pay is not going to solve all of Greece's problems - but the austerity is disproportionately hitting those less able to pay. How is the economy ever going to get off the ground when many people can barely afford to heat their homes? There have also been record numbers who have had their electricity cut off because they can no longer afford to pay. The electricity bills keep going up. WHY ? people are hurting, so why does the power company (owned by the state), which has done everything to stifle competition from private firms, keep raising its rates?

Then there are the billions (yes BILLIONS, not millions but BILLIONS) of euros stashed away by rich Greeks in foreign accounts. As far as I know, if the political will was there, it is possible to go after them to pay taxes, but unfortunately, it is lacking.

It sounds like I keep going on about the rich are to blame, but the economy will never recover by getting those least able to afford it, to dig deeper into their empty pockets. It simply can not work that way.

The euro crisis no one is talking about: France is in free fallBy Shawn Tully, senior editor-at-large January 9, 2013: 9:26 AM ET

The euro zone's second-largest economy is suffering more than any other member from a shocking deterioration in competitiveness. And it's doing nothing to stop it.

FORTUNE -- Given investors' confidence in its sovereign debt, and its image as Germany's principal partner in the sturdy, sensible "northern" eurozone, you'd think that France endures as the co-guardian of the endangered single currency. Indeed, the rate on France's ten-year government bonds stands at just 2%, just a few ticks above Germany's. From a quick look at the headline numbers, France doesn't appear nearly as stressed as the derisively titled "PIIGS," Portugal, Ireland, Italy, Greece and Spain. So far, the trajectory of its debts and deficits isn't as distressing as the figures for the PIIGs, or even the U.K. and the U.S.

France's vaunted role in the creation and initial success of the euro enhances its aura of solidity. It was President Francois Mitterrand who in 1989 persuaded Chancellor Helmut Kohl to back monetary union in exchange for France's support for German reunification. In fact, France and Germany, along with the Netherlands, dramatized their commitment by effectively uniting the franc and deutschemark in a currency union that held their exchange rates in a narrow band, and heralded the euro's birth in 1999. In the boom years of the mid-2000s, France virtually matched Germany as the twin growth engine of the thriving, 17-nation eurozone.

A deeper look shows that France is mired in no less than an economic crisis. The eurozone's second-largest economy (2012 GDP: 2 trillion euros) is suffering more than any other member from a shocking deterioration in competitiveness. Put simply, France's products -- its cars, steel, clothing, electronics -- cost far too much to produce compared with competing goods both from Asia and its European neighbors, including not just Germany but even Spain and Italy. That's causing a sharp and accelerating fall in its exports, and a significant decline in manufacturing and the services that support it.

The virtual implosion of French industry is overlooked by analysts and pundits who claim that the eurozone had dodged disaster and entered a new, durable period of stability. In fact, it's France -- not Greece or Spain -- that now poses the greatest threat to the euro's survival. France epitomizes the real problem with the single currency: The inability of nations with high and rising production costs to adjust their currencies so that their products remain competitive in world markets.

So far, the worries over the euro have centered on dangerously rising debt and deficits. But those fiscal problems are primarily the result of a loss of competitiveness. When products cost too much to make, the economy stalls or actually declines, so that even modest increases in government spending swamp nations with big budget shortfalls and excessive borrowings. In this no-or-negative growth scenario, the picture is usually the same: The private economy shrinks while government keeps expanding.

That's already happened in Italy, Spain and other troubled eurozone members. The difference is that those nations are adopting structural reforms to restore their competitiveness. France is doing nothing of the kind. Hence, its yawning competitiveness gap will soon create a fiscal crisis. It's absolutely astonishing that an economy so large, and so widely respected, can be unraveling so quickly.

The world's investors and the euro zone optimists should awaken to the danger posed by France. La crise est arivée.

France's decline is best illustrated by the rapid deterioration in its foreign trade. In 1999, France sold around 7% of the world's exports. Today, the figure is just over 3%, and falling fast. The same high costs that are pounding exports draw an ever rising flow of goods from Germany, China and even southern Europe. Those imports are taking an increasing share of sales from pricier French-made products. In 2005, France's trade balance was a positive 0.5% of GDP. Today, it stands at minus 2.7% of national income, meaning imports now far exceed exports, turning trade from a growth-generator into a major drag. An excellent illustration of the competitiveness gap is the chasm between German and French exports to China. Germany sends $70 billion in cars, machine tools and other products to China each year, seven times the figure for France.

Even tourism is suffering because of the France's high prices. France is now struggling clientele from a surging, bargain-seeking tranche of the market, travelers from Asia, Brazil, India and Russia. In the mid-2000s, foreigners spent 15 billion euros more visiting the Champs Elysees and the Riviera than the French paid to vacation abroad. That surplus has since fallen by one-third, to around 10 billion euros.

The main reason for France's cost disadvantage is the burden of labor, a factor that typically accounts for around 70% of all corporate expenses worldwide. In France, the problem comprises a both high wage and social costs, and rigid laws, including a 35-hour work week that allows French employees the lowest number of working hours in the developed world. An astounding 86% of all wage earners enjoy "contrats a durée indéterminées," permanent contracts that make layoffs extremely expensive and time-consuming.

In France, 42 euros for every 100 euros in total expenses go to social charges, versus 34 euros in Germany, 26 in the UK, and 20 in the US.

Obviously, the restrictive laws and hostile unions are nothing new. What's causing the crippling malaise is the recent rapid rise in labor costs when rivals are lowering or moderating the weight of weight of their workforces.

Since 2005, France's unit labor costs -- the expense of producing a single car or steel beam, for example -- has jumped 17% compared with 10% for Germany, 5.8% for Spain, and 2% for Ireland. Today, French workers earn an average of 35.3 euros per hour, compared with 25.8 in Italy, 22 in the UK and Spain.

The result is a steep fall in French manufacturing and the services that support it, everything from consulting to logistics. Corporate profits have plunged to 6.5% of GDP, about 60% of the euro zone average. That's because French exporters are losing market share, and the ones that survive must lower margins to charge competitive prices. As a result, they lack the funds to invest in new plants and technologies. France now has half as many exporting companies as Germany and, amazingly, Italy. German industry benefits from 19,000 robots, five times the number in France. As for R&D spending, it's dropped 50% in the past four years.

Remarkably, the Hollande government is raising revenue by heightening the burden on business. In September, France announced new laws that limit deductions for interest payments and loss carry-forwards, effectively heaping higher taxes on business. Those measures will shrink already meager profits, and crimp future investment.

The cost-gap wouldn't be so damaging if France specialized in sophisticated, high-margin products. Indeed, the nation remains strong in fashion, luxury goods, and pharmaceuticals. But though those offerings symbolize France's economic élan, the nation is heavily dependent on autos, textile, steel, telecom equipment and other mid-to-low margin products that are extremely price sensitive on world markets. "France has never been strong in high-end, sophisticated products like machine tools or high-end computer equipment," says Jean-Christophe Caffet of Flash Economics in Paris. "And even in the high-end, it's lost a lot of market share to Germany."

Germany, for example, specializes in fancy cars, Audis, Mercedes and BMWs that folks are willing to keep buying if prices rise a bit. By contrast, France makes cheaper Renaults and Peugeots that risk losing sales to Ford or Fiat unless manufacturers hold down prices -- or settle for puny or non-existent profits.

Nor is France reacting to the looming crisis by following its neighbors' campaign to lower labor costs. Germany made big strides in the mid-2000s with its Hartz IV reforms that lowered the social charges on businesses. Spain recently raised the retirement age for full pensions from 65 to 67 and allows wage negotiations at the company level, a departure from the centralized system of imposing mandatory nationwide increases in pay. Italy is gradually raising the retirement age for women from 60 to 66 over the next six years.

But Francois Hollande, elected president in May, is taking far more tepid steps. The government is pledging to modestly lower social charges on businesses, but the reforms don't start until 2014, and last just two years.

It's the prospect of a future without growth, a direct legacy of the competitiveness problem, that could unleash a fiscal crisis. It's remarkable that in the mid-1990s, France had a lower unemployment rate than Germany, smaller deficits, less debt to GDP, and approximately the same growth rate. All of those measures have now totally reversed.

In 2012, the French economy expanded at just 0.2%, and its real growth rate for the past three years averaged 1.2%, less than half Germany's 2.7% performance. For 2013, France's ODDO Securities makes a persuasive case that the economy will actually shrink. The unemployment rate stands at a 14-year high of 10.9% and rising, compared 6.7% for Germany. Debt to GDP is nearing the danger zone of 90%, and could hit 97% in 2013.

It's not that France has been raising government spending at an outrageous rate. The issue is that a nation with already high spending levels and no growth has run out of room to keep lifting spending, and debt, at all. It's extraordinary that from 2004 to 2012, the private sector in France showed no growth whatsoever, adjusted for inflation. The entire rise in GDP, a mere 7.3% over eight years, came from government spending. It's the private economy that supports that spending, and it will keep dwindling, driving France further and further into debt.

Government spending now accounts for 57% of GDP and increasing, 12 points higher than Germany. By the way, Germany's private sector is growing briskly as public expenditures drop as a share of national income. The opposite dynamic is plaguing its long-time partner.

It's totally implausible to blame "austerity" for France's poor growth. Austerity is generally defined as large reductions in budget deficits, mainly driven by falling government spending. But France's spending has increased in real terms, and its deficits have been remained at a substantial 5% or so of GDP in 2011 and 2012, with the same figure likely for this year.

It's unclear when the crisis that's going mostly unacknowledged by investors and the Hollande government will erupt into a panic. The chance that France will lower labor costs by the 20% to 30% needed to restore growth is practically zero. Reforms can only happen when the economy is expanding and citizens feel good about the future, the antithesis of the gloom now enveloping France.

France is heading towards an economic Bastille. The longer it stays on that path, the more possible that the eurozone regime it labored so hard to create will crumble.

Hotel Mama: Bad Economy Has Young Europeans at HomeYoung Europeans in countries hit hardest by the Continent's economic crisis are finding it difficult to move out of their parents' home. Data shows that over 50 percent of those aged 25 to 34 in some countries have yet to move out.

DER SPIEGELYoung people in Southern and Eastern Europe live at home longer.Most young adults are eager to leave home to start independent lives. But in those European countries where the economic crisis has hit hardest -- particularly in southern and eastern EU member states -- that appears to be a difficult move to make.

ANZEIGEIn 2011, more that 50 percent of the 25- to 34-year-olds in Greece, Bulgaria, Slovakia and Malta still lived in their parents' homes, a SPIEGEL analysis of information from the European Commission statistics division Eurostat has revealed.

In Portugal, Italy, Hungary and Romania more than 40 percent of those in this age group remain in the nest (see graphic).

Nations with a high percentage of Catholics show a particularly high number of young adults who have yet to move out of their parents' home. This is also the case in Eastern Europe, where working conditions for entry-level workers are particularly precarious.

These numbers are in stark contrast to those in the EU's most northerly member nations, where less than 5 percent of 24- to 34-year-olds in Finland, Sweden and Denmark continue to enjoy the luxuries of Hotel Mama. In Germany, the level is 14.7 percent.

A similar phenomenon, dubbed the "boomerang generation," has been identified in the United States, which is suffering from a long recession. The Pew Research Center reports that some 29 percent of Americans in the same age have had to return to their parents' home in recent years. And some 78 percent of them say they are happy with their living arrangements.

British Prime Minister David Cameron will deliver a speech in London on Jan. 23, during which he will discuss the future of the United Kingdom's relationship with the European Union. Excerpts leaked to the media suggest that harsh EU criticism will figure prominently in the speech, a suggestion in keeping with Cameron's recent statements about the bloc. But more important, the excerpts signal an unprecedented policy departure: renegotiating the United Kingdom's role in the European Union. London has negotiated exemptions from some EU policies in the past, even gaining some concessions from Brussels in the process; this time, it is trying to become less integrated with the bloc altogether.

Cameron has pledged to hold a referendum after 2015 on the United Kingdom's role in Europe. He has also said he would reclaim powers London surrendered to the European Union. While they no doubt reflect similar anxieties across the Continent, such statements are anathema to the European project, and by making them, Cameron could be setting a precedent that could further undermine the European Union.

Cameron's Compromise

Cameron's strategy partly is a reaction to British domestic politics. There is a faction within the ruling Conservative Party that believes the country should abandon the European Union entirely. It was this faction that pressed Cameron to call a referendum on the United Kingdom's EU membership. Some party members also fear that the United Kingdom Independence Party, the country's traditionally euroskeptic party, is gaining ground in the country.

Such fears may be well founded. According to various opinion polls, roughly 8-14 percent of the country supports the United Kingdom Independence Party, even though it received only 3.1 percent of the popular vote in the 2010 elections. These levels of support make the party a serious contender with the Liberal Democrats as the United Kingdom's third-largest party (after the Labour Party and the Conservative Party). Some polls show that the United Kingdom Independence Party already is the third-most popular party, while others suggest it has poached members from the Conservative Party, a worrying trend ahead of elections for the European Parliament in 2014 and general elections in 2015.

Its growing popularity can be attributed to other factors. Beyond its anti-EU rhetoric, the United Kingdom Independence Party is gaining strength as an anti-establishment voice in the country, supported by those disappointed with mainstream British parties. Similar situations are developing elsewhere in Europe, where the ongoing crisis has weakened the traditional political elite.

The debate over the United Kingdom's role in the European Union is also causing friction with the Conservatives' junior coalition partner, the Liberal Democrats. Party leader and Deputy Prime Minister Nick Clegg has repeatedly criticized the Conservatives' push for a referendum, arguing that the proposal is creating uncertainty in the country and by extension threatening economic growth and job creation. Several of the country's top businessmen share this belief. On Jan. 9, Virgin Group's Richard Branson, London Stock Exchange head Chris Gibson-Smith and eight other business leaders published a letter in the Financial Times criticizing Cameron's plan to renegotiate EU membership terms.

British citizens likewise are conflicted on the subject. In general, polls have shown that a slight majority of Britons favor leaving the European Union, but recent surveys found that opinion was evenly split. Conservative Party voters particularly support an EU withdrawal.

Given the issue's sensitivity, Cameron has sought to please everyone. He said there would be a referendum, but it would entail the United Kingdom's position in the European Union, not British membership. Despite his criticisms of the bloc, Cameron has said he does not want to leave the European Union outright; rather, he wants to repatriate from Brussels as many powers as possible. Cameron believes the United Kingdom still needs direct access to Europe's common market but that London should regain power regarding such issues as employment legislation and social and judicial affairs. Most important, the referendum would take place after the general elections of 2015.

London's Costs of Membership

London also believes that the United Kingdom has surrendered too much of its national sovereignty to supranational EU institutions. The United Kingdom is a net contributor to the European Union, and London feels that the costs of membership exceed the benefits. The Common Agricultural Policy, which subsidizes agricultural sectors in continental Europe, does not really benefit the United Kingdom, and the Common Fisheries Policy has forced the United Kingdom to share its fishing waters with other EU member states.

Yet the United Kingdom is a strong defender of the single market. Roughly half of its exports end up in the European Union, and half of its imports come from the European Union. While the United States is the United Kingdom's single most important export destination, four of its five top export destinations are eurozone countries: Germany, the Netherlands, France and Ireland. Germany is also the source of about 12.6 percent of all British imports.

Some critics suggest that the United Kingdom could leave the European Union but remain a part of the European Economic Area, the trade agreement that includes non-EU members, such as Iceland and Norway. However, the country would still be required to make financial contributions to continental Europe and adapt its legal order to EU standards, but it would not have a vote in EU decisions. According to Cameron, the United Kingdom must be part of the common market and have a say in policymaking.

The issue points to the United Kingdom's grand strategy. Despite an alliance with the United States, the United Kingdom is essentially a European power, and it cannot afford to be excluded from Continental affairs. Throughout history, London's foremost concern has been the emergence of a single European power that could threaten the British Isles politically, economically or militarily. Maintaining the balance of power in the Continent -- especially one in which London has some degree of influence -- is a strategic imperative for the United Kingdom.

The United Kingdom's Strategic Dilemma

The United Kingdom's push to renegotiate its status in the European Union threatens the European project. In the past, the bloc granted special concessions to the British, such as allowing them to keep the pound sterling during Maastricht Treaty negotiations. These concessions inspired other EU members to ask for similar treatment -- most notably Denmark, which also managed to opt out of the euro.

However, this is the first time that London has openly demanded the return to a previous stage in the process of European integration. At no other time has a country tried to dissociate itself from the bloc in this way. The decision not only challenges the Franco-German view of the European Union but also makes a compromise extremely difficult and risky between France and Germany and the United Kingdom.

Most important, Cameron is framing his proposals not in terms of national sovereignty but in terms of social well-being. In doing so, he acknowledges the social implications of the European crisis. Cameron has even said that the European Union currently is hurting its citizens more than it is helping them. According to leaked portions of his upcoming speech, he believes that there is a "growing frustration that the EU is seen as something that is done to people rather than acting on their behalf" and that the issues are "being intensified by the very solutions required to resolve the economic problems."

The excerpts also cite Cameron as saying "people are increasingly frustrated that decisions taken further and further away from them mean their living standards are slashed through enforced austerity or their taxes are used to bail out governments on the other side of the Continent." This rhetoric could become highly attractive in Europe, where people from Germany to Finland believe that taxpayers' money is being used to bail out inefficient peripheral countries. And many Greek, Spanish and Portuguese citizens probably would sympathize with the notion that austerity is worsening their quality of life. Cameron's rhetoric suggests that he is positioning the United Kingdom to be the leader of a counternarrative that opposes Germany's view of the crisis.

But this strategy is not without risks for the United Kingdom. In recent years, the country's veto power in the European Union has been reduced substantially. With each reform of the European treaties, unanimous decisions were replaced by the use of qualified majority. Even in cases where unanimity is required, Berlin and Paris have managed to bypass London when making decisions. For example, Cameron refused to sign the fiscal compact treaty in 2011, but Germany and France decided to proceed with it, even if only 25 of the 27 EU members accepted it.

Moreover, the "enhanced cooperation mechanism," the system by which EU members can make decisions without the participation of other members, increasingly has been used to move forward with European projects. Currently, the EU's Financial Transaction Tax is being negotiated under this format. In recent times, London has been able only to achieve exemptions without real power to block decisions.

Meanwhile, the ongoing crisis has compelled the European Union to prioritize the 17 members of the eurozone over the rest of the bloc. This has created a two-speed Europe, where core EU members integrate even further as the others are neglected somewhat. London could try to become the leader of the non-eurozone countries, but these countries often have competing agendas, as evidenced by recent negotiations over the EU budget. In those negotiations, the United Kingdom was pushing for a smaller EU budget to ease its financial burden, but countries like Poland and Romania were interested in maintaining high agricultural subsidies and strong development aid.

The dilemma is best understood in the context of the United Kingdom's grand strategy. Unnecessary political isolation on the Continent is a real threat to London. The more the European Union focuses on the eurozone, the less influence the United Kingdom has on continental Europe. The eurozone currently stretches from Finland to Portugal, creating the type of unified, Continental entity that London fears.

For the British, this threat can be mitigated in several ways, the most important of which is its alliance with the United States. As long as London is the main military ally and a major economic partner of the world's only superpower, continental Europe cannot afford to ignore the United Kingdom. Moreover, London also represents a viable alternative to the German leadership of Europe, especially when France is weak and enmeshed in its own domestic problems. And even if the United Kingdom chooses to move away from mainland Europe, its political and economic influence will continue to be felt in the Continent.

The United Kingdom's grand strategy has long been characterized by balancing between Europe and the United States. Currently, London is not so much redefining that grand strategy as it is shifting its weight away from Europe without completely abandoning the Continent..

Read more: United Kingdom Moves Away from the European Project | Stratfor

France 'totally bankrupt', says labour minister Michel SapinFrance's labour minister sent the country into a state of shock on Monday after he described the nation as “totally bankrupt”.

The comments came as President Hollande attempts to improve the image of the French economy Photo: AFP By Graham Ruddick8:00PM GMT 28 Jan 2013

Michel Sapin made the gaffe in a radio interview, which left French President Francois Hollande battling to undo the potential reputational damage.

“There is a state but it is a totally bankrupt state,” Mr Sapin said. “That is why we had to put a deficit reduction plan in place, and nothing should make us turn away from that objective.”

The comments came as President Hollande attempts to improve the image of the French economy after pledging to reduce the country’s deficit by cutting spending by €60bn (£51.5bn) over the next five years and increasing taxes by €20bn.

Data from Banque de France showed earlier this month that a flight of capital has already left the country amid concerns that France’s Socialist leader intends to soak the rich and businesses. The actor Gérard Depardieu has renounced his French citizenship and decamped to Russia in protest, while David Cameron said Britain will “roll out the red carpet” to attract wealthy individuals.

Pierre Moscovici, the finance minister, said the comments by Mr Sapin were “inappropriate”.

He added: “France is a really solvent country. France is a really credible country, France is a country that is starting to recover.”

Crafty wrote recently: "I note how hard the first Euro downturn hit the US markets."

That was back in the good old days when the European problem was Greece. Then Ireland, Portugal, Spain, Italy.

Now we have France making Obama look like a supply-sider and Germany shutting down all nuclear and choking itself over energy:

http://rt.com/news/germany-poland-nuclear-fukushima-574/Germany is facing rapidly climbing energy costs after turning away from nuclear power following the Fukushima disaster, instead relying increasingly on renewable energy. Meanwhile, its neighbors are building nuclear power stations on its doorstep.

Who holds up Europe when France implodes and the German economy stalls? The steady UK economy where they raised tax rates from 40% to 50% and panicked and lowered them to 45%, all since 2010.

As Ed mentioned in his rundown of the Eurozone’s systemic problems earlier this week, Italy as a country just resoundingly voted in rejection of fiscal austerity, and their financial and economic outlook is looking pretty bleak — an outlook just made even bleaker by January’s record-high unemployment numbers released today. Via Reuters:

Italy’s seasonally adjusted unemployment rate jumped to 11.7 percent in January from 11.3 percent the month before to hit its highest level for at least 21 years, data showed on Friday.

The figure was above all forecasts in a Reuters survey of analysts which pointed to a marginal uptick to 11.3 percent. …

Both overall unemployment and youth unemployment were the highest since the current statistical series was begun in 1992.

And that’s not all. Italy’s increasingly poor economic performance combined with all of the Eurozone’s continued economic doldrums has pushed the 17-member bloc’s collective unemployment rate into new territory:

The unemployment rate in the euro zone edged up in January to a new record, official data showed Friday, as the ailing European economy continued to weigh on the job market. …

Unemployment in the 17-nation euro zone climbed to 11.9 percent in January from 11.8 percent the previous month, according to Eurostat, the statistical office of the European Union.

For the 27 nations of the Union, the jobless rate in January stood at 10.8 percent, up from 10.7 percent in December. All of the figures were seasonally adjusted. …

The jobless data “suggest that wage growth is set to weaken from already low rates” and further depress consumer spending, which has already been damped by government austerity measures, Jennifer McKeown, an economist at Capital Economics in London, wrote in a research note.

Europe did pretty well at convincing themselves that the worst of the European debt crisis was over, but was it really just the eye of the storm? These unemployment rates and the recently revised economic growth forecasts for 2013 aren’t going to make austerity measures any more welcome in the eyes of voters — and if Italy and Spain, the bloc’s third and fourth largest economies end up needing bailouts, it could very well spell extended troubles for the eurozone’s prospects, says Robert Samuelson:

The euro crisis is back. Actually, it never left. But there was an extended period, beginning last summer, when Europe’s political, business and media elites convinced themselves the worst had passed. The European Central Bank (ECB) — Europe’s Federal Reserve — had tranquilized jittery bond markets. …

But Italians did send a message. “The election wasn’t just anti-austerity. It was also anti-German,” says David Smick, editor of The International Economy magazine. “Berlusconi’s rhetoric was very anti-German. In Italian politics now, it’s dangerous to appear being the lapdog of [German Chancellor] Angela Merkel.” In one dazzling stroke, Italian voters rejected both Europe’s main response to high government debt — cut spending, raise taxes — and the policy’s most powerful architect, Germany’s Merkel. If Italy needs to be bailed out, the negotiations already look tortuous. …

The amounts required would dwarf the rescues of Greece, Portugal and Ireland. Agreement would be hardly guaranteed. As conditions for aid, the ECB and Germany have insisted on precisely the austerity and structural changes that Italian voters just rejected. Could Italy, backed by other debtor nations, force changes in old policies and, if not, what happens? Europe’s future remains in play.

Dangerous Times: How Euro-socialism Set off a Fascist BombBy James Lewis and Justine Aristea

In the terrible economic crisis of 1922 Benito Mussolini got 25% of the vote in Italy. Two years later he had more than a majority.

You know the rest.

In the economic crisis of 2013, Beppe Grillo received 24% of the vote (see last week's analysis of Grillo's political beliefs). This week he blocked a government from forming. Grillo now controls the Senate, but he is going for a majority in both houses in the upcoming vote in June.

That's in Italy, but in Greece the Golden Dawn party is following the same path. So is the new Hungarian fascist resurgence. In Germany it's called the "Pirate Party."

Europe's political class is shocked and panicked. They are pretending Grillo is just a "populist" and a "reformer" -- but he also wants to "process" all the Jews in the world, who are responsible for all the evil. Grillo wants to nationalize the banks and abolish interest rates, "just like the Islamic Development Bank."

To understand the new upsurge of European fascism, you have to imagine what it's like to live in Rome.

Imagine the US government being sunk in red ink. The United Nations suspends the US Constitution and compels us to adopt a new UN currency called the UNO, designed to favor other countries. The United States no longer runs its own currency. Our economy tanks and our deficit keeps getting worse.

Therefore the UN unilaterally appoints a caretaker president for the US named Monti, who imposes radical budget cuts on our dependent welfare state.

1. Social Security is cut by half. People have to live on 700 euros per month.

2. ObamaCare is cut by half. Two hospitals in Rome do not pay their medical staffs for six months.

3. Taxes on income and sales are raised to an average of 50%.

4. Small business taxes are increased -- but big businesses taxes are lowered, "because big business is more efficient." (Meaning it has bigger unions).

5. Politicians and bureaucrats get major pay raises. The figurehead President of the US doubles his salary.

Government at all levels is corrupt. It's the only way people can survive. Everybody is playing double games. People are doing two jobs and running their own businesses out of government offices. Everybody cheats on taxes. The mafia controls half the country. Survival depends on the black market, the black economy. The currency is kept artificially high, so exports crash.

It's happened to Italy under the European Union. Don't think it can't happen here. Obama is a Euro socialist, representing faculty lounge socialism in America, so completely arrogant and cocksure that Paul Krugman just knows how to run the trillion-dollar US economy. Nobody else can figure it out, but Krugman knows that he knows. Our new rulers are control freaks, just as free market economists have said since Adam Smith. They are six year olds steering the family car and thinking they are in control until...

... until it all blows up.

This week Europe blew up. The media haven't caught up yet, because they are what they are. But the markets are catching up fast.

This is a huge event for the United States, because our political elite is bound and determined to turn us into Europe. Hasn't the EU found the answer to war and peace and prosperity forever?

Our Democrats believe it. Europe is their model. Every batty new idea they have is copied from the glorious European Union. Twenty years ago they still celebrated the Soviet Union, until that house of cards crumbled. Now they have shifted their fantasy paradise to Europe.

Over there, fifty years of increasingly centralized control have made it impossible for voters to be heard. The political parties are stuck in GroupThink. Only the fascist "protest" parties agitate for reform. The ruling class doesn't listen. They don't have to -- they don't have to run for election.

So European voters fled to the fascists to express their rage and despair. Imagine one out of four US voters going for Lincoln Rockwell, and you get the idea.

In Italy, Beppe Grillo the Clown just received 24% of the vote, the biggest percentage a single party has received since Benito Mussolini, Il Duce, in 1922, another economic crisis year.

The Italian vote gives the Clown control of the Senate, and the biggest voice in the lower house. The Grillini now speak for the capital city of Rome. Since fascism is illegal in Italy, the Five Star Party pretends not to be fascist; but scratch the surface and that old grinning ghost stares back at you.)

The EU and US media are still in denial, but Italian party politicians instantly flew to Berlin to talk with Angela Merkel, and came back to build a common front against Grillo the Clown. But the Joker refused to play. He wants another election in June.

Europe is our future. It's Obama style of Chicago "governance," and as long as the people were inundated by EU propaganda they believed that Europe had discovered the secret of peace and welfare forever. Talk to any European and that's what you hear. They keep wondering why we don't follow them to Never-Neverland. If you tell question them they turn a deaf ear. They're mentally stuck.

As long as America defends Europe, they will keep hating us and pretending they are running the ocean liner, like kids with plastic steering wheels.

The key to the whole farce is Europe's "democracy deficit," which means that the people can vote for the European Parliament -- but it has no legislative powers at all. The Parliament is a Potemkin front. It has no power to pass binding laws.

On the other hand, the unelected ruling class has centralized more and more power in "Commissions" -- which is what the word "Soviets" used to mean. But the EU has no electoral legitimacy. Nobody votes for the people who really run the place. That means the EU receives no feedback about the impact of its cult-like policy fantasies. When the people wanted a public referendum on the EU, the political class arrogantly told them to go... yes.

In France, the Grand Corps of the State ("Enarques") run the government. Germany and Britain are similar. Together they appoint the European ruling elite. This is the EU socialist Apparat, the Political Machine that controls everything. And yes, there are capitalists, but they work hand-in-glove with the Apparat. It's Crony Social Capitalism (technically the same as fascism).

As a result normal people feel totally powerless. As long as the Ponzi scheme lasts, the victims loved it. The media churned out neo-imperialist propaganda about how Europe had finally discovered peace and welfare forever, and everybody wanted to believe.

Today, southern and eastern Europe are running into a brick wall, designed by Europe's ruling class in its delusional way. The north blames the south, and vice versa. Nobody can stop the ruling class from its mad rush to destruction, so we are seeing a 'protest vote" in Germany, Poland, eastern Europe, and the PIIGS -- the Mediterranean coastal countries plus Ireland.

The only protest party people can vote for are barely disguised fascists: The Five Star party in Italy, Golden Dawn in Greece, Pirate Party in Germany, and fascist insurgents in Hungary.

Here's how it's done. In Italy Beppe Grillo ran as a sly comedian, spinning off conspiracy theories about 'chemtrails" (jet contrails) that poison the Italian people, the Rockefellers, Rothschilds and Illuminati who run the world to oppress the poor, and all the usual paranoid fantasies. But he also attacked massive corruption (which is true) and self-serving politicians (also true), and the euro currency that killed Italian exports (also true). Grillo voiced criticisms that other politicians avoided. Everybody knows about massive corruption, for example. Grillo said it.

Now the Clown has his own sources of money and ideology, which lead straight to Tehran, as we have pointed out. The Clown hates the Jews, and his website mentions "Jews" 2,500 times, and "Iran" 2,500 times. The Islamic Development Bank doesn't charge interest, the Clown tells us. This is pure Islamic fascist propaganda. Banks that loan free money don't exist in the real world, because they can't survive. But demagogues tell sucker lies, and this is a good one. Beppe tells his followers that he will nationalize the banks (like Il Duce) and give away free loans. It's like Obama phones, straight from Obama's stash. The suckers love it.

The Jews run the world by charging "usury" (this is an old, old story in Europe). In Beppe's Fantasyland money comes free, exactly what Islamist propaganda says. Beppe tells the world that "Everything I know about the Middle East I've learned from my father-in-law" Parvin Tajik, who runs a major construction business in Tehran, and therefore has to be in cahoots with the super-corrupt mullahs.

The euro sign in front of the European Central Bank building in Frankfurt, Germany

Since the onset of its economic crisis, Europe has been marked by widening divides over the eurozone's goals and structure. In recent months, a new split has emerged: The populations of countries on the eurozone's periphery -- those feeling the sharpest sting of austerity measures -- still widely support the common currency. Meanwhile, euroskeptic narratives that reject some of Europe's fundamental structures -- namely the free movement of people, goods and services -- have been gaining support in Europe's wealthier core countries.

But peripheral support for the currency bloc is likely shaded by hopes of a return to Europe's pre-crisis environment. And the core's insistence on austerity measures and economic reforms makes such a return unlikely in the near future. Such conflicting views appear likely to undermine policies designed to deal with the crisis and threaten the very foundations of the European Union.

Analysis

On March 10, an opinion poll was published in Italy suggesting that, despite the country's political and economic crises, more than 70 percent of Italians support membership in the eurozone. The dynamic in Italy resembles those in other peripheral countries such as Greece and Spain, where opinion polls have consistently revealed strong support for the currency bloc, despite the crisis. In contrast, recent German media attention has been focused on Alternative for Germany -- a new political party proposing that countries should be allowed to leave the eurozone and create smaller currency unions with fewer members.

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In the peripheral countries, support for austerity measures implemented by Brussels has waned, while discontent with the political elites who support such policies has become widespread. The 2012 elections in Greece and elections in Italy in February 2013 confirmed this trend, with anti-system parties in both countries performing strongly. Indeed, rejections of austerity policies in Europe have often been accompanied by strong criticism of the bureaucracy in Brussels -- and even Germany's leadership during the crisis -- as well.

Reasons to Remain

However, few Italians wish to return to the lira and even fewer Greeks want the drachma. There are some concrete economic explanations for this sentiment. For example, a strong currency allows peripheral countries to sustain their energy imports. There are also less-quantifiable reasons to remain in the eurozone, such as a sense of belonging to Europe. In peripheral countries -- states that might otherwise be isolated internationally or subjugated by other external actors -- EU membership and the euro have high symbolic value.

This sentiment partly explains why, for example, Latvia still hopes to join the eurozone by Jan. 1, 2014, and Croatia is seeking to join the European Union in July. Moreover, Portugal, Greece and Spain each joined after the fall of a dictatorship, and each believed that EU membership would expedite integration with the West and invite investment and funding from Europe and the broader international community. In Italy, the anti-establishment Five Star Movement has gradually softened its criticism of the eurozone and centered its campaign on a criticism of the country's political elites. None of these countries want to risk being isolated from the rest of Europe.

However, the evident desire to remain in the eurozone, and even in the European Union, is likely affected by hopes that Europe will return to its pre-crisis environment. In other words, it is a desire for the Continent to return to the days of cheap credit, low unemployment and high social spending. In essence, the European periphery wants the benefits of the eurozone without most of the costs. Opinion polls can be misleading if questions about remaining in the common currency are not linked to austerity measures.

For peripheral countries, a return to pre-crisis Europe will likely be hindered by conflicting visions of the eurozone between the bloc's core and peripheral countries. Governments in core countries tend to view peripheral countries critically and, for example, believe that they should implement austerity measures and economic reforms to clean up their balance sheets and avoid sparking a repeat crisis.

Such views have often been even more pronounced among local populations. While national governments accept the idea that peripheral members should receive bailouts eventually to prevent the crisis from deepening, such rescues often are unpopular among voters. Thus, governments in core countries have been forced into a sort of balancing act: To maintain domestic support, they have attempted to appear inflexible toward peripheral countries in pressuring them to apply economic reforms. But to prevent the financial crisis from spreading, core governments have still been willing to dole out rescue funds.

Cracks in the Eurozone's Foundation

VIDEO: The Eurozone's Political Challenge (Agenda). This dynamic has created a significant political problem in Europe's core, where the strongest opposition to some of the fundamental principles of the European Union have emerged. Among core political parties and governments, discontent has been especially strong about issues such as immigration, the Schengen area, the common currency and even the free movement of goods.

As a result, Northern Europe is currently facing the real possibility that euroskepticism gains enough popularity to become an issue capable of swinging elections. Even leaders who recognize the benefits of EU membership may become euroskeptics if they perceive a change in the social mood. The growing criticism of the European Union by the British government highlights this possibility.

One of the main causes of the crisis in Europe -- and probably the biggest obstacle to implementing the policies needed to escape the crisis -- is the difference in visions held by Europeans about the bloc's function and objectives. These rifts remained dormant during the prosperous period that followed the creation of the European Union. But the European crisis has allowed these issues to reemerge, and it is threatening the European project at its foundations.

Standard and Poor's sees a high risk that Spain, Italy, Portugal and France will not be able to carry through necessary reforms as the unemployed become less willing to put up with austerity, S&P's Germany head Torsten Hinrichs told a newspaper.

"The high unemployment in Spain, Italy and France is socially explosive," Hinrichs was quoted as saying in Monday's Neue Osnabrcker Zeitung.

"There has to be a social consensus for saving measures. High unemployment ... does not help."

Hinrichs said the people of Spain and Portugal had already proven they were willing to bear with austerity measures, but "this cannot continue forever".

In Italy, there was the further danger that "a new government may not be strong enough for the still necessary reforms to strengthen growth," he said.

Hinrichs said S&P still rated Germany as a triple A with stable outlook and did not see any reason for concern: "It is one of the few AAA and stable countries that we still have in Europe".

The weak profitability of the banking sector due to the profusion of banks was the only problem in Germany, he said, although he saw positive changes in the sector in terms of equity capital and refinancing.

On the roundtable of the Bret Baier Special Report someone (Krauthammer?) said that the Russians have offered to bail out Cyprus in return for the rights to the huge natural gas field in Cyprian waters , , ,

The European economic crisis has taken different forms in different places, and Cyprus is the latest country to face the prospect of financial ruin. Overextended banks in Cyprus are teetering on the brink of failure for issuing loans they cannot repay, which has prompted the tiny Mediterranean country, a member of the European Union, to turn to Brussels for help. Late Sunday, the European Union and Cypriot president announced new terms for a bailout that would provide the infusion of cash necessary to prevent bankruptcies in Cyprus' banking sector and, more important, prevent a banking panic from spreading to the rest of Europe.

What makes this crisis different from the previous bailouts for Greece, Ireland or elsewhere are the conditions Brussels has attached for its assistance. Due to circumstances unique to Cyprus, namely the questionable origin of a large chunk of the deposits in its now-stricken banking sector and that sector's small size relative to the overall European economy, the European Union, led by Germany, has taken a harder line with the country. Cyprus has few sources of capital besides its capacity as a banking shelter, so Brussels required that the country raise part of the necessary funds from its own banking sector -- possibly by seizing money from certain bank deposits and putting it toward the bailout fund. The proposal has not yet been approved, but if enacted it would undermine a formerly sacred principle of banking in most industrial nations -- the security of deposits -- setting a new and possibly destabilizing precedent in Europe.

Cyprus' Dilemma

For years before the crisis, Cyprus promoted itself as an offshore financial center by creating a tax structure and banking rules that made depositing money in the country attractive to foreigners. As a result, Cyprus' financial sector grew to dwarf the rest of the Cypriot economy, accounting for about eight times the country's annual gross domestic product and employing a substantial portion of the nation's work force. A side effect of this strategy, however, was that if the financial sector experienced problems, the rest of the domestic economy would not be big enough to stabilize the banks without outside help.

Europe's economic crisis spawned precisely those sorts of problems for the Cypriot banking sector. This was not just a concern for Cyprus, though. Even though Cyprus' banking sector is tiny relative to the rest of Europe's, one Cypriot bank defaulting on what it owed other banks could put the whole European banking system in question, and the last thing the European Union needs now is a crisis of confidence in its banks.

The Cypriots were facing chaos if their banks failed because the insurance system was insufficient to cover the claims of depositors. For its part, the European Union could not risk the financial contagion. But Brussels could not simply bail out the entire banking system, both because of the precedent it would set and because the political support for a total bailout wasn't there. This was particularly the case for Germany, which would carry much of the financial burden and is preparing for elections in September 2013 before an electorate that is increasingly hostile to bailouts.

Even though the German public may oppose the bailouts, it benefits immensely from what those bailouts preserve. As I have pointed out many times, Germany is heavily dependent on exports and the European Union is critical to those exports as a free trade zone. Although Germany also imports a great deal from the rest of the bloc, a break in the free trade zone would be catastrophic for the German economy. If all imports were cut along with exports, Germany would still be devastated because what it produces and exports and what it imports are very different things. Germany could not absorb all its production and would experience massive unemployment.

Currently, Germany's unemployment rate is below 6 percent while Spain's is above 25 percent. An exploding financial crisis would cut into consumption, which would particularly hurt an export-dependent country like Germany. Berlin's posture through much of the European economic crisis has been to pretend it is about to stop providing assistance to other countries, but the fact is that doing so would inflict pain on Germany, too. Germany will make its threats and its voters will be upset, but in the end, the country would not be enjoying high employment if the crisis got out of hand. So the German game is to constantly threaten to let someone sink, while in the end doing whatever has to be done.

Cyprus was a place where Germany could show its willingness to get tough but didn't carry any of the risks that would arise in pushing a country such as Spain too hard, for example. Cyprus' economy was small enough and its problems unique enough that the rest of Europe could dismiss any measures taken against the country as a one-off. Here was a case where the German position appears enormously more powerful than usual. And in isolation, this is true -- if we ignore the question of what conclusion the rest of Europe, and the world, draws from the treatment of Cyprus.

A Firmer Line

Under German guidance, the European Union made an extraordinary demand on the Cypriots. It demanded that a tax be placed on deposits in the country's two largest banks. The tax would be about 10 percent and would, under the initial terms, be applied to all accounts, regardless of their size. This was an unprecedented solution. Since the global financial crisis of the 1920s, all advanced industrial countries -- and many others -- had been operating on a fundamental principle that deposits in banks were utterly secure. They were not regarded as bonds paying certain interest, whose value would disappear if the bank failed. Deposits were regarded as riskless placements of money, with the risk covered by deposit insurance for smaller deposits, but in practical terms, guaranteed by the national wealth.

This guarantee meant that individual savings would be safe and that working capital parked by corporations in a bank was safe as well. The alternative was not only uncertainty, but also people hoarding cash and preventing it from entering the financial system. It was necessary to have a secure place to put money so that it was available for lending. The runs on banks in the 1920s and 1930s drove home the need for total security for deposits.

Brussels demanded that the bailout for Cypriot banks be partly paid for by depositors in those banks. That demand essentially violated the social contract on the sanctity of bank deposits and did so in a country that was a member of the European Union -- one of the world's major economic blocs. Proponents of the measure pointed out that many of the depositors were not Cypriot nationals but rather foreigners, many of whom were Russian. Moreover, it was suggested that the only reason for a Russian to be putting money in a Cypriot bank was to get it out of Russia, and the only motive for that had to be nefarious. It followed that the confiscation was not targeted against ordinary people but against shady Russians.

There is no question that there are shady Russians putting money into Cyprus. But ordinary Cypriots had their money in the same banks and so did many Cypriot and foreign companies, including European companies, who were doing business in Cyprus and need money for payroll and so on. The proposal might look like an attempt to seize Russian money, but it would pinch the bank accounts of all Cypriots as well as a sizable amount of legitimate Russian money. Confiscating 10 percent of all deposits could devastate individuals and the overall economy and likely would prompt companies operating in Cyprus to move their cash elsewhere. The measure would have been devastating and the Cypriot parliament rejected it.

Another deal, the one currently up for approval, tried to mitigate the problem but still broke the social contract. Accounts smaller than 100,000 euros (about $128,000) would not be touched. However, accounts larger than 100,000 euros would be taxed at an uncertain rate, currently estimated at 20 percent, while bondholders would lose up to 40 percent. These numbers will likely shift again, but assuming they are close to the final figures, depositors putting money into banks beyond this amount are at risk depending on the financial condition of the bank.

The impact on Cyprus is more than Russian mafia money being taxed. All corporations doing business in Cyprus could have 20 percent of their operating cash seized. Regardless of precisely how the Cypriot banking system is restructured, the fact is that the European Union demanded that Cyprus seize portions of bank accounts from large depositors. From a business' perspective, 100,000 euros is not all that much when you are running a supermarket or a car dealership or a construction company, but this arbitrary level could easily be raised in the future and the mere existence of the measure will make attracting investment more difficult.

A New Precedent

The more significant development was the fact that the European Union has now made it official policy, under certain circumstances, to encourage member states to seize depositors' assets to pay for the stabilization of financial institutions. To put it simply, if you are a business, the safety of your money in a bank depends on the bank's financial condition and the political considerations of the European Union. What had been a haven -- no risk and minimal returns -- now has minimal returns and unknown risks. Brussels' emphasis that this was mostly Russian money is not assuring, either. More than just Russian money stands to be taken for the bailout fund if the new policy is approved. Moreover, the point of the global banking system is that money is safe wherever it is deposited. Europe has other money centers, like Luxembourg, where the financial system outstrips gross domestic product. There are no problems there right now, but as we have learned, the European Union is an uncertain place. If Russian deposits can be seized in Nicosia, why not American deposits in Luxembourg?

This was why it was so important to emphasize the potentially criminal nature of the Russian deposits and to downplay the effect on ordinary law-abiding Cypriots. Brussels has worked very hard to make the Cyprus case seem unique and non-replicable: Cyprus is small and its banking system attracted criminals, so the principle that deposits in banks are secure doesn't necessarily apply there. Another way to look at it is that an EU member, like some other members of the bloc, could not guarantee the solvency of its banks so Brussels forced the country to seize deposits in order to receive help stabilizing the system. Viewed that way, the European Union has established a new option for itself in dealing with depositors in troubled banks, and that principle now applies to all of Europe, particularly to those countries with financial institutions potentially facing similar problems.

The question, of course, is whether foreign depositors in European banks will accept that Cyprus was one of a kind. If they decide that it isn't obvious, then foreign corporations -- and even European corporations -- could start pulling at least part of their cash out of European banks and putting it elsewhere. They can minimize the amount of cash on hand in Europe by shifting to non-European banks and transferring as needed. Those withdrawals, if they occur, could create a massive liquidity crisis in Europe. At the very least, every reasonable CFO will now assume that the risk in Europe has risen and that an eye needs to be kept on the financial health of institutions where they have deposits. In Europe, depositing money in a bank is no longer a no-brainer.

Now we must ask ourselves why the Germans would have created this risk. One answer is that they were confident they could convince depositors that Cyprus was one of a kind and not to be repeated. The other answer was that they had no choice. The first explanation was undermined March 25, when Eurogroup President Jeroen Dijsselbloem said that the model used in Cyprus could be used in future bank bailouts. Locked in by an electorate that does not fully understand Germany's vulnerability, the German government decided it had to take a hard line on Cyprus regardless of risk. Or Germany may be preparing a new strategy for the management of the European financial crisis. The banking system in Europe is too big to salvage if it comes to a serious crisis. Any solution will involve the loss of depositors' money. Contemplating that concept could lead to a run on banks that would trigger the crisis Europe fears. Solving a crisis and guaranteeing depositors may be seen as having impossible consequences. Setting the precedent in Cyprus has the advantage of not appearing to be a precedent.

It's not clear what the Germans or the EU negotiators are thinking, and all these theories are speculative. What is certain is that an EU country, facing a crisis in its financial system, is now weighing whether to pay for that crisis by seizing depositors' money. And with that, the Europeans have broken a barrier that has been in place since the 1930s. They didn't do that casually and they didn't do that because they wanted to. But they did it..

The ‘Emminger letter’ forms one of the more obscure parts of the history of the German Bundesbank. It is also one of the most chilling. And, in the hard-line negotiations over the latest Cyprus bail-out package, 35 years after it was written, it has just made a singular re-entry.

The document, drawn up in secret in 1978, gave the German central bank the power to side-step formal obligations to support weaker countries via foreign exchange intervention during European currency turmoil. Emminger was one of the most influential figures rebuilding German post-war central banking from the 1950s.He was a member of the board of the Bundesbank and its forerunner, Bank deutscher Länder, for 26 years, finishing as Bundesbank president from 1977 to 1979. Emminger died in 1986. But his spirit lingers on.

The European Central Bank (ECB) ultimatum delivered to Cyprus on 21 March, giving the country until the following Monday to agree a lending deal with the International Monetary Fund and the European Union or risk bankruptcy, bore the Emminger hallmarks. The ECB governing council said its Emergency Liquidity Assistance (ELA) to Cyprus would not be renewed unless an official programme was in place – sparking frantic diplomatic action that led finally to a deal closing down the island’s second biggest bank and imposing swingeing write-offs on large depositors.

The ultimatum marked a dramatic change of ECB tactics. In previous action, the ECB had maintained generous ELA assistance for Ireland and Greece, under lending that is deemed semi-automatic unless the governing council (currently 23 people, all men) decides with a two-thirds majority to close it down. The lending has attracted great displeasure in Germany and other current account surplus countries.

With Cyprus, the hard currency central banks behind the ECB, led by the Bundesbank, decided they had had enough. By ensuring its habitually tough line unreservedly became ECB policy, the Bundesbank – without needing to act in public – strode to the front line of the debate over the future of economic and monetary union (EMU).

The Emminger episode bears resemblance to this because, in the 1960s and 1970s, the Bundesbank was perennially haunted by the fear that its efforts to control the German monetary base and hence German inflation would be compromised by commitments to buy large volumes of foreign currencies to maintain exchange rate stability. These obligations were imposed first by the Bretton Woods fixed exchange rate agreements and then by various European currency arrangements.

In EMU, the Bundesbank is highly wary of the risks caused by the build-up of its assets with the ECB reflecting the ECB’s lending to hard-hit peripheral countries, which includes borrowings under the ELA. The Bundesbank’s assets under the so-called Target-2 system for short term liquidity transfers were €613bn as of end-February, up from €547bn in February last year, making up roughly two-thirds of the Bundesbank’s balance sheet. The Target-2 total has declined by around €140bn since the peak in August last year, but greatly exceeds the Bundesbank’s gold stocks worth €132bn as of end-February as well as its €29bn of foreign exchange reserves.

The significance of the Emminger letter is that he wrote it at a similarly fraught time of skirmishing over Europe’s monetary framework. Emminger sent the missive to Helmut Schmidt, then West German chancellor, on 16 November 1978 to register the Bundesbank council’s approval of most of the elements of the prospective agreement setting up the European Monetary System (EMS), which developed later into EMU.

However, Emminger and his council colleagues disagreed with the feature of the EMS agreement that the Bundesbank would be forced to intervene with unlimited amounts of D-Mark sales and foreign currency purchases whenever European partners’ currencies reached their floor in the EMS’s exchange rate mechanism (ERM).

The letter made clear the Bundesbank’s desire to be freed from this obligation to intervene during monetary crises. Schmidt sent Emminger a telex message signalling agreement on all the outstanding issues apart from the intervention exemption.

On 30 November Schmidt attended a lengthy Bundesbank council meeting in Frankfurt to clinch agreement on the EMS details. Schmidt pointed out, to Emminger’s evident satisfaction, that – in relation to the intervention exemption – he had annotated the Bundesbank president’s letter of 16 November with an ‘r’ to indicate ‘richtig’ (‘right’ in German) or, as he said, ‘factual agreement’.

This deviation, Schmidt told the council, was allowable under the classical legal exemption clause ‘clausula rebus sic stantibus’ (‘Treaties may become inapplicable because of changes in circumstances’). However, he affirmed that the modification should remain secret and could not be part of a formal agreement. ‘Let us imagine that this appeared in a French or Italian newspaper tomorrow,’ Schmidt told the council, according to official documents that were published only 30 years later. ‘The editorials would criticise their own governments for believing such a shallow promise from the Germans. A [German] government promises to intervene to uphold certain rules of the game, but then writes in an internal paper that it intends to act differently at times of emergency.’

The Emminger letter was brought into play, with great effect, 24 years later on Friday 11 September 1992, a day after the Banca d’Italia, the Italian central bank, publicly complained about ‘excessively high’ Bundesbank interest rates, when the lira fell to its lowest permitted point in the exchange rate mechanism, triggering enormous obligatory intervention from the Bundesbank and Banca d’Italia. In the light of massive inflows of liquidity threatening to disrupt German monetary policy, the Bundesbank invoked the Emminger let-out clause to free it from the constraint of making unlimited lira support purchases.

The news shocked the Italians. Carlo Azeglio Ciampi, governor of the Banca d’Italia, was conferring with prime minister Giuliano Amato and finance minister Piero Barucci at the prime minister’s office in Rome when Ciampi was called to the telephone to be told that the Bundesbank would stop intervening on Monday. ‘When he came back, he was pale, almost white,’ Amato recalled later. The episode forced a lira devaluation over the weekend and helped sparked a run on the British pound on Wednesday 16 September (known later as ‘Black Wednesday’) when both the UK and Italy had to leave the ERM.

The Bundesbank carefully avoided having to resort to the Emminger letter that day because it intervened to buy Dutch guilders, forcing the guilder rather than the D-Mark to the top of the ERM intervention framework against sterling and therefore avoiding any Bundesbank obligation to undertake unlimited purchases of sterling.

The Emminger letter was also invoked later that month in a furious battle with the French government and the Banque de France to prevent the French franc from devaluing within the ERM. A top French official Guillaume Hannezo reiterated Paris’s surprise over the discovery of the Emminger letter limiting the Bundesbank’s intervention obligations. ‘This is singular: a treaty from state to state can be repudiated by an independent public organ.’

The various intrigues surrounding the Emminger letter are shadowy and somewhat convoluted. Jens Weidmann, the current Bundesbank president, who has been known to cite Emminger approvingly in his speeches, was 10 years old when the document was written.

However, there is one man to whom it is not a mystery. Mario Draghi, the ECB president, and the man who authorised the 21 March Cypriot ultimatum, was head of the Italian Treasury during the September 1992 encounters with the Bundesbank.

Draghi has been on the receiving end of the Bundesbank’s power. And he could be excused for now thinking he can unleash some of it in the service of the ECB.

Yikes. The end of 2012 marked a collective economic contraction in the eurozone for the fifth straight quarter, and the 17-member currency bloc is well on track to logging their sixth:

Official figures for first-quarter economic activity won’t be released until May 15, but the monthly Eurocoin measure of euro-zone output released Friday signaled a contraction for March, having earlier signaled declines in activity in January and February.

The measure, which is compiled by London-based Center for Economic Policy Research and the Bank of Italy, also showed a drop in gross domestic product in each of the three months of the fourth quarter, an indication borne out later when official data showed the euro-zone economy shrank by 0.6%.

That dreary outlook is further corroborated by the revised January and today’s February jobs reports, which reported eurozone unemployment coming in at a whopping 12 percent — the highest figure since the currency was first launched in 1999.

The number of people unemployed in the 17 member states rose by 33,000 during [February], to hit 19.07 million, the statistics agency Eurostat said. …

The jobless figures from Eurostat also showed that Spain’s unemployment rate hit 26.3% in February, while the rate in Portugal remained stable at 17.5%.

The lowest rates were recorded in Austria (4.8%) and Germany (5.4%), both unchanged from January. The overall unemployment rate for the eurozone in January was revised up from 11.9% to 12%. …

The fresh high in the unemployment rate “is further confirmation of the underlying weakness of the economy”, said Jennifer McKeown at Capital Economics.

“The rise in unemployment was the 22nd in a row, making this labour market downturn the most prolonged since the early 1990s.”

And this is all from February, before the Cyprus situation even got started — it’s relative impact might not be huge, but I’d doubt that that chaos and the accompanying market-jitters are going to do anything helpful for business confidence or the labor market, nor for the EU’s long-term stability.

These are just more reminders of what happens after repeated failures to substantively deal with brewing debt crises and practice fiscal responsibility — but hey, it’s cool, because “we don’t have an immediate crisis in terms of debt” and “for the next 10 years, it’s gonna be in a sustainable place,” or something.

"Shed no tears. Cyprus reaps the foreseeable consequences of a deliberate plan, hatched 40 years ago, to create a lightly-regulated financial centre and capture restless offshore money. Finance moved en masse from Beirut to Cyprus when Lebanon collapsed into civil war. Milosevic’s Serbia banked and traded through Cyprus to evade sanctions during the Yugoslav wars. Russian billions round-tripped through Cyprus to evade tax. Real earnings in Cyprus quadrupled in 1975-2011. Victims? Hardly."

Cyprus reaches end of a long and sleazy roadBy David Gardner in BeirutThe island’s collapse is not really the result of a random lurch

The sudden tumble of Cyprus from sun-kissed prosperity into bleak penury must certainly have felt precipitate to many of its citizens – more like a scalping than a haircut

But the collapse is not really the result of a random lurch or shift in axis. It is the end of a path traced in a long, complacent arc of ease and sleaze that hit a wall.

It is almost 40 years since the east Mediterranean island was traumatised by partition. In 1974, an Athens-inspired coup aimed at unifying Cyprus with Greece led to Turkey’s invasion of the island, the northern third of which remains largely isolated under Turkish tutelage.

Yet it was not long after this that the Greek Cypriot south embarked on the economic course that would ultimately lead it to meltdown: to bet its part of the island on building a low tax, high-return, lightly regulated banking centre, with comfortable layers of ancillary services in auditing and law, “corporate formation” and shipping management, real estate and so on. For a long time, this worked exceptionally well.

Ordinary Greek Cypriots will now feel they are victims of brutal outside forces in a German-dominated Europe. But Cyprus was also the beneficiary of brutal outside developments. Cyprus grew rich on the misfortunes of its neighbours; its decision to do a certain kind of banking for a living was shaped by the disintegration of Lebanon, the former Yugoslavia and the Soviet Union.

Beirut was the unchallenged financial and services entrepôt between the west and the petrodollar-fired Middle East until Lebanon descended into civil war in 1975. As that tribal war ground on until 1990, with two further wars with Israel to come, Cyprus acquired bits of Beirut’s banking business, but seemingly little of the ostensibly free-wheeling Lebanese capital’s conservative banking habits – such as high levels of provisioning against bad loans and very high deposits to loans ratios.

One need go no further than compare Cypriot banks’ catastrophic exposure to Greek bonds, a market with which Beirut financiers were familiar, but cautious.

By the time the Lebanon war ended, the wars of the Yugoslav succession were getting underway. Bankers and politicians in Cyprus gave Slobodan Milosevic, the Serbian strongman, a lifeline by enabling him to evade western sanctions and prosecute the wars in Bosnia and Kosovo during the 1990s. By then, Cyprus had acquired critical mass as a banking destination sufficient for its close-knit elite to profit mightily from the collapse of the Soviet Union, the rise of Russia’s oligarchs, and then the uncertainties of doing business under Vladimir Putin’s unpredictable rules. Russian billions, round-tripping through Cyprus, gave the island’s economy a huge lift.

In per capita income terms, Cypriots quadrupled their real earnings, in constant money, between 1975 and 2011, according to the World Bank; in nominal terms, or current US dollars, the UN records a rise in earnings per head from $1,451 to $30,523 over the same period.

While Cyprus used the common ties of the Christian Orthodox religion to strengthen all these connections, it was received into the European Union (in 2004) and the euro (in 2008), was designated by the IMF an advanced economy (in 2011), and even became a modest net contributor to the EU budget, alongside the Germans and the Dutch. Times were sweet.

Nobody – including, until recently, the markets – appears to have suggested to the Cypriots that tax havens and brass plaque economies were falling out of favour; that giant financial bubbles attached to small islands (think Iceland) were falling into the sea; or that if politicians in the EU north were taking flak about “bailing out” the south they would certainly not form an orderly queue to aid wealthy Russian depositors.

Cyprus, moreover, has not made too many friends in the EU because of its obstructionism over the 2004 UN plan to reunify the island and over fraught relations with Turkey. An irony of its current drama is that one partial palliative – the discovery of rich hydrocarbons reserves in its coastal waters – will push Cyprus towards Turkey, the most easily accessible market for its gas when it desperately needs to find ways of replacing banking-generated wealth.

That has gone for ever.============================

And a response:

>>>> One need go no further than compare Cypriot banks’ catastrophic exposure to Greek bonds <<<<

There is only one serious question - WHY did the Cypriot banks invest so heavily into those Greek bonds? I'm willing to bet a $20 bill against a cup of Starbucks that it was related to political pressure. I expect that sooner or later the truth will emerge, and it will be similar to the way our politicians "encouraged" financial institutions to offer mortgages to people who clearly couldn't afford to pay them.

The talk about the "Russian mobsters" is smoke and mirrors, designed to make this bank robbery a little more palatable to the masses. This is a precedent which will damage the very foundations of Western society. If politicians can order appropriations of private funds from private banks - so, whom can you trust? Where are you going to keep your saving? The Caymans? It wouldn't take a single platoon of Marines to take full control of that country (if, of course, the UK is on on the deal).

The European Union was founded on the free movement of people, goods, services and capital. All of these basic freedoms are inextricably intertwined with the European crisis. The free movement of people is being questioned in numerous countries, while the free movement of goods and services is in part responsible for the current crisis. The free movement of capital has forced EU leaders to face the consequences of different national banking regulations that allow capital flight and tax evasion. While better oversight and collaboration make tax collection across borders easier, they do little to stem capital flight, which weakens banking sectors in already struggling economies.

Analysis

The creation of a common market where people, goods, services and capital could move freely was one of the main goals of the Treaty of Rome -- the agreement between France, West Germany, Italy, the Netherlands, Belgium and Luxembourg that created the European Economic Community in 1957. It took the four decades between the Treaty of Rome and the 1992 Treaty of Maastricht for the members of the European Union to develop the principles of the common market, and some gaps remain.

The free movement of people is the principle that allows EU citizens to travel to or live and work in any member country. It has come under threat from several governments and political parties in Europe. In the United Kingdom, the conservative government of Prime Minister David Cameron is analyzing ways to prevent the arrival of Romanian and Bulgarian workers, who will be allowed to work legally in the United Kingdom starting next year. According to the British government, those workers would collapse the British healthcare system. In countries such as France, Sweden, Finland and Denmark, parties that reject immigration are gaining ground.

The free movement of goods and services is fundamental to the customs union and a key component of the crisis of the eurozone. The creation of the eurozone put 17 countries with varying levels of economic development and competitiveness in a currency union. This has created significant trade imbalances between the less developed economies in the eurozone periphery and Germany, Europe's main exporter. Before the introduction of the euro, countries in the periphery could apply monetary policy to deal with growing current account deficits, but now the common currency has deprived them of that tool.

As the crisis deepens, the European Union has begun to pay more attention to the links between the crisis and the last founding principle -- the free movement of capital. The bailouts for Ireland, Greece and Spain highlighted the fragility of the banking sectors in the eurozone periphery and created fears of financial instability spreading to the rest of the members of the common currency. The bailout for Cyprus incorporated an additional element, due to the island's opaque banking sector, that forced depositors to take a hit. This decision brought uncertainty about the future format of EU bailouts. Even though the leaders of Portugal, Slovenia and Luxembourg said that Cyprus was an isolated issue, there is no way to be certain that this will not be the new norm for bailouts in the eurozone.

The European Union is trying to address the problems of its banking sector through the creation of a banking union -- a mechanism that would put all the eurozone banks under the supervision of a single entity, provide joint funds to rescue banks in distress and provide all banks with the common deposit guarantee. This idea has been controversial since the beginning. First, there was a debate regarding which banks should be supervised. In December 2012, the European Union agreed that only the largest banks in the eurozone would be put under supervision. Second, the idea of a joint insurance mechanism and bank resolution fund was highly controversial because countries with strong banking sectors refuse to take responsibility for failing banks. As a result, EU leaders decided to postpone the insurance mechanism's implementation.

With the first stage of the banking union projected to become operational in early 2014, EU leaders are dealing with another one of the eurozone's problems: the fight against tax evasion. Often, residents of EU countries are able to avoid taxation in their country of residence by having bank accounts in another member state. In 2003, the European Union tried to solve this problem by getting EU members to agree to implement an automatic exchange of information between states concerning interest payments.

But Belgium, Austria and Luxembourg objected to the disclosure of account holders' names, arguing that they would not be able to compete with non-EU countries with strong banking sectors such as Switzerland and Liechtenstein. As a result, they were granted exceptions to the system of information exchanging. In 2010, as the crisis on the Continent intensified, Belgium decided to comply with the exchange of information system, and now Brussels is pressuring Austria and Luxembourg to do the same. The issue has recently become particularly heated. Countries such as France and Spain have seen numerous corruption scandals in which public officials had secret bank accounts in other countries.

Under pressure from the European Union, the government of Luxembourg announced April 10 that it will implement rules on the automatic exchange of bank account information with the rest of the European Union beginning in 2015. The decision took place one day after the finance ministers of Germany, France, the United Kingdom, Italy and Spain sent a letter to the EU Commission proposing the creation of an information exchange system to fight tax evasion. In addition, Austrian Chancellor Werner Faymann said April 9 that his country is ready to discuss a more intensive exchange of information about its banking sector.

VIDEO: European Union's Push for Bank Transparency.

While efforts to share banking information are moving forward, two problems remain. The first is enforcement. In their April 9 letter to the EU Commission, Europe's five largest economies (Germany, France, the United Kingdom, Italy and Spain) proposed to improve the current mechanisms of information exchange between banks in the European Union, admitting that the mechanisms in place are not enough to prevent evasion. Second, these information-sharing measures are not designed to prevent capital flight from countries in the periphery to countries in the core -- another significant problem based on the free movement of capital. In October, the International Monetary Fund warned that uncertainty is encouraging flights of money from the periphery to Northern Europe and to countries outside the currency union.

Leading up to the crisis, free capital mobility facilitated a credit boom in the eurozone periphery. With the crisis, this mobility has weakened the banking sectors of countries in the periphery because depositors face no hurdles in fleeing to more stable banking sectors in the north. Bank loans are the most important credit channel for companies in Europe, so the continued weakening of banking sectors in the periphery adds more problems to these already struggling economies, thus exacerbating the differences between the core and the periphery of the eurozone..

The English are feeling the pinch in relation to recent events in Syria and have therefore raised their security level from “Miffed” to “Peeved.” Soon, though, security levels may be raised yet again to “Irritated” or even “A Bit Cross.” The English have not been “A Bit Cross” since the blitz in 1940 when tea supplies nearly ran out. Terrorists have been re-categorized from “Tiresome” to “A Bloody Nuisance.” The last time the British issued a “Bloody Nuisance” warning level was in 1588, when threatened by the Spanish Armada.

The Scots have raised their threat level from “Pissed Off” to “Let’s get the Bastards.” They don’t have any other levels. This is the reason they have been used on the front line of the British army for the last 300 years.

The French government announced yesterday that it has raised its terror alert level from “Run” to “Hide.” The only two higher levels in France are “Collaborate” and “Surrender.” The rise was precipitated by a recent fire that destroyed France ‘s white flag factory, effectively paralyzing the country’s military capability.

Italy has increased the alert level from “Shout Loudly and Excitedly” to “Elaborate Military Posturing.” Two more levels remain: “Ineffective Combat Operations” and “Change Sides.”

The Germans have increased their alert state from “Disdainful Arrogance” to “Dress in Uniform and Sing Marching Songs.” They also have two higher levels: “Invade a Neighbour” and “Lose.”

Belgians, on the other hand, are all on holiday as usual; the only threat they are worried about is NATO pulling out of Brussels ..

The Spanish are all excited to see their new submarines ready to deploy. These beautifully designed subs have glass bottoms so the new Spanish navy can get a really good look at the old Spanish navy.

Australia, meanwhile, has raised its security level from “No worries” to “She’ll be right, Mate.” Two more escalation levels remain: “Crikey! I think we’ll need to cancel the barbie this weekend!” and “The barbie is cancelled.” So far no situation has ever warranted use of the last final escalation level.

And as a final thought – Greece is collapsing, the Iranians are getting aggressive, and Rome is in disarray. Welcome back to 430 BC.

The English are feeling the pinch in relation to recent events in Syria and have therefore raised their security level from “Miffed” to “Peeved.” Soon, though, security levels may be raised yet again to “Irritated” or even “A Bit Cross.” The English have not been “A Bit Cross” since the blitz in 1940 when tea supplies nearly ran out. Terrorists have been re-categorized from “Tiresome” to “A Bloody Nuisance.” The last time the British issued a “Bloody Nuisance” warning level was in 1588, when threatened by the Spanish Armada.

Britain didn't exist in 1588 though

They also get p**sed of when people use "english" and "british" interchangeably

Today, one out of four French university graduates wants to emigrate, “and this rises to 80 per cent or 90 per cent in the case of marketable degrees”, says economics professor Jacques Régniez, who teaches at both the Sorbonne and the University of New York in Prague. “In one of my finance seminars, every single French student intends to go abroad.”

“The French workforce is now two-speed,” explains a headhunter who shuttles between Paris and London. “Among the young, perhaps a third speak English, are willing to relocate, and want to work. For one thing, their dream employers are the more prosperous of the large French multinationals, almost all those in the CAC40 index, who make over half of their profits abroad, sometimes over 90 per cent – companies like, say, L’Oréal, Schneider or Danone. This is why French universities have shocked the Académie française and now teach many courses in English.

“But I’ve also seen determined young people take jobs in places like Vietnam, with local contracts and nothing like the level of protection afforded by French labour law, in order to gain a proper first experience of business in a competitive environment. And then you have a large group whose ambition is simply to stay outside the economy.”

This means a trade-off with which anyone in France is familiar: young people, and many of their parents, dream of getting any kind of state or local administration post, usually badly paid, very often frustrating, but which ensures complete job security, unrelated to the economic situation, the market, or their own performance.

Germany said it believed that U.S. intelligence agencies may be spying on Chancellor Angela Merkel's cellphone, an intrusion that could escalate the international furor over U.S. data surveillance and complicate Washington's relationship with one of its staunchest allies.

Ms. Merkel spoke by phone with President Barack Obama on Wednesday and made clear that such surveillance among allies would be "fully unacceptable" and a "grave breach of trust," her spokesman said in a statement released late Wednesday in Berlin.

Mr. Obama assured the German leader that the U.S. isn't monitoring her communications and won't in the future, a White House spokesman said. He wouldn't say whether it had occurred in the past.

The uproar in Berlin is the latest sign that the National Security Agency scandal has the potential to continue to inflict damage on Washington's relationships with overseas partners. Earlier this week, Mr. Obama called French President François Hollande, who expressed his "deep disapproval" over reports that the NSA was collecting data on tens of millions of French phone calls and messages. Reports of U.S. spying on Brazilian President Dilma Rousseff as well as Mexico's Enrique Peña Nieto during his successful presidential campaign have already strained the U.S. relationship with Latin America.

The German government's sharply worded statement came after it looked into an inquiry from the weekly Der Spiegel, the magazine reported. Der Spiegel said U.S. spies may have specifically targeted Ms. Merkel's cellphone—as opposed to having just intercepted her communications as part of a broader dragnet.Read More

U.S. Spy Charges Enliven EU Digital Summit

Apple marks its territory in the Chinese tablet market, the "Bishop of Bling" is suspended by Pope Francis, and Germany suspects the U.S. is tapping Angela Merkel's mobile phone. The Foreign Bureau tracks the top world stories of the day.

German intelligence followed up on the information and determined it may be true, according to the magazine, leading to the tense phone call with the White House.

There was no information as to how Ms. Merkel's phone was monitored or what information the U.S. gleaned.

If true, the allegations would present Washington with an even more serious diplomatic challenge that could affect a range of economic and security issues.

Germany, a member of the Group of Seven leading economies and the dominant economic force in Europe, is a crucial partner for the U.S. on a range of international issues, from combating the euro-zone crisis to negotiating a trans-Atlantic free-trade agreement.

Ms. Merkel has played an important role in talks over global hot spots like Syria and Iran, and Germany is home to the U.S. military's most important bases in Europe. In 2011, Mr. Obama hosted Ms. Merkel in Washington for a state dinner.

Given the depth of the relationship between the two countries and Germany's long-standing support of the U.S., it is unclear why U.S. intelligence might target her. Mr. Obama said over the summer, as allegations about NSA spying first surfaced, that he could simply call Ms. Merkel if he needed to know what she was thinking.

But Ms. Merkel conceivably may have been targeted for advance knowledge of Germany's positions before a major summit, or to understand Germany's relations with countries like Iran and Russia, said James Lewis, a former State Department official who is now a technology-policy specialist at the Center for Strategic and International Studies.

"The Germans are basically running Europe now," he said. "What are the Germans thinking about the European crisis? Are the Germans going to stop bailing out the Greeks?"

The new revelations come ahead of a European Union summit on Thursday, where leaders are expected to discuss ways to protect personal data in the wake of previous disclosures about the NSA's surveillance programs. Demands for stronger protections and guarantees from the U.S. that it won't violate European privacy laws will have even more urgency following the disclosures about Ms. Merkel.

Ms. Merkel, despite an uproar in Germany over NSA surveillance over the summer, had appeared willing to give the U.S. the benefit of the doubt. Asked in a news conference July 19 whether she ever had "the uncomfortable feeling that the big brother from America might be listening in" while she talked on the phone, Ms. Merkel answered simply: "No."

On Wednesday night, the tone in Berlin changed sharply.

"The government has received information that the mobile phone of the chancellor may be under surveillance by U.S. agencies," said Ms. Merkel's spokesman, Steffen Seibert. "We have made an urgent inquiry to our American partners and have asked for an immediate and comprehensive explanation."

In her call with Mr. Obama, Ms. Merkel said she "unequivocally deplores such practices and sees them as completely unacceptable," according to Mr. Seibert. The spokesman said Ms. Merkel expected U.S. agencies to explain their overall surveillance practices against Germany, "questions that the German government asked months ago."

Ms. Merkel is known as a frequent texter, sometimes sending and receiving missives in public.

When the NSA scandal first broke in Germany over the summer, with reports that the U.S. was spying on Germans, opposition parties tried to use U.S. surveillance as a campaign issue against Ms. Merkel.

But despite the approaching parliamentary election in September, she resisted calls to take drastic action against the U.S.—such as shelving talks on the free-trade agreement—and underscored the importance of international cooperation in collecting intelligence.

Germany's highly unusual statement and strong words came after Der Spiegel contacted the government about a related story it was working on, the publication reported on its website. Der Spiegel said Germany's intelligence agency and its information security office checked out the magazine's information and believed it was serious enough to confront the U.S. government with it.

Der Spiegel didn't say what sources its research was based on, but the magazine has published a series of articles in recent months based on documents from former NSA contractor Edward Snowden. Der Spiegel said there was evidence that Ms. Merkel "may have been a target for years for U.S. intelligence agencies." It didn't publish documents or other evidence to back up those claims.

The White House said Mr. Obama assured Ms. Merkel in the call that the U.S. "is not monitoring and will not monitor" her communications. "The United States greatly values our close cooperation with Germany on a broad range of shared security challenges," White House spokesman Jay Carney said.

While not usually discussed in public, it is well known within intelligence circles that allies spy on each other.

Washington's assurances on Wednesday didn't appear to be entirely convincing.

"Between close friends and partners, as Germany and the United States have been for decades, such surveillance of the communications of heads of government cannot exist," Mr. Seibert said. "This would be a grave breach of trust."

And they will stop cooperating with us on the fight against terrorism? Good luck with that.

Like drone warfare, Libya intervention and so many other things, imagine if this had happened under Bush - or Romney, Pres. Cruz. etc. Like you say, instead we see the obligatory, fake outrage. Other than seek campaign contributions, Obama isn't going to do anything with the information.

Inspired by Scotland's hopes for independence and hot on the heels of Crime'a 95% preference for accession to Russia, 89% of the citizens of Venice voted for their own sovereign state in a ‘referendum’ on independence from Italy. As The Daily Mail reports, the proposed ‘Repubblica Veneta’ includes the five million inhabitants of the Veneto region and has been largely driven by the wealthy 'who are tired of supporting the poor and crime-ridden south' (Venice pays EUR71bn in taxes and receives only EUR21bn in services and investment). The ballot appointed a committee of ten who immediately declared independence from Italy. Venice may now start withholding taxes from Rome. http://www.dailymail.co.uk/news/article-2586531/Venice-votes-split-Italy-89-citys-residents-opt-form-new-independent-state.html

As is often the case with Stratfor, the economics of the following is littered with Keynesian babble, but there are some interesting details to be gleaned nonetheless.

Berlin Fears a High Court Ruling Could Threaten the European UnionGeopolitical WeeklyTuesday, April 15, 2014 - 03:03 Print Text SizeStratfor

By Marc Lanthemann

The Greek economy ended its four-year exile from international markets last week with a triumphant 3 billion euro (about $4.1 billion) bond sale. The global financial media trumpeted this somewhat unexpected achievement as a sign that things were finally turning around in the European Union's most blighted country. Media reports to the contrary, Greece's return to the market does nothing to resolve Greece's systemic economic deficiencies. Instead, it enables Greece to build up more debt, which will leave it a permanent bailout state for the foreseeable future.

In any case, events in Athens, a city perennially destined to be a dependent on the great powers of any given time, will not be pivotal to the future of the European Union. Nor will decisions made in Spain, Italy or even France. Instead, the Continent's fate in the 21st century will be decided in Germany. Germany stands increasingly alone as the guardian of the very European order that allowed it to prosper and quelled its historical insecurities about its neighbors.

Something as seemingly banal as a conversation at an Italian restaurant in Berlin does a much better job of illustrating how far Europe actually is from recovery, and how the fate of the Continent lies in Germany's hands. In the first days of April, German Interior Minister Thomas de Maiziere met with a group of scholars of constitutional law for dinner and discussion of the options for limiting the reach of Germany's powerful Federal Constitutional Court. The meeting stands testament to the German fear of seeing the European order crumble and to the severity of the political crisis brewing under the surface in the Continent.The Perils of Unemployment

Stratfor has warned for years that the economic downturn that began battering Europe in 2008 would evolve into a full-blown social and political crisis. Nearly six years have gone by, and the European system remains as dysfunctional today as it was then. Great Depression-levels of unemployment have become the norm in Southern Europe, and have begun to creep northward.

Growing numbers of the unemployed and underemployed are fertile ground for political radicalism. Now, hopelessness about the future of Europe is moving into the mainstream. In election after election from France to Hungary, nationalist and Euroskeptic parties continue to gain in popularity to the point that they are becoming entrenched parts of the political system.

They remain a minority, for now. But many of them, in particular the National Front in France, have had to moderate some of the more radical parts of their platforms to break into the political mainstream. As popular discontent against what is seen as the failures of the pro-European mainstream parties grows alongside the economic crisis, so does support for some of the more nationalistic policies espoused by the far right.

The modern European establishment has only recently begun acknowledging the threat of radical parties. Next month's EU parliamentary elections have amplified the establishment's concerns. National elites have a tendency to deride what they perceive as loud and unrefined fringe groups, and to show considerable surprise when they become a political mainstay.

More aggressive commentators have denounced the European leadership for allocating inordinate resources to stabilizing the Continent's financial sector while pursuing tepid policies to stem the unemployment crisis. But while unemployment is ultimately a much more dangerous risk factor for the medium- to long-term stability of Europe, it is also a more difficult problem to solve.

Unemployment is a deeply political issue, much more so than a bank's balance sheet. It intersects not only with issues of economics, but also with myriad others including social welfare and sovereignty. While it is generally agreed that a growing economy leads to lower unemployment, the mechanics of job creation are not as clear-cut as those governing sovereign debt risk.

A sea change on how European elites, and Germany in particular, view the crisis now appears to lie ahead. The strategic threat posed by unemployment-fueled nationalism has become a core preoccupation in both Berlin and Brussels. It is becoming clearer that while current stopgap measures, including European Central Bank President Mario Draghi's famous open-ended bailout guarantee, may have warded off a fatal shock to Europe's economy, they are doing little to revive it.

Actually reviving it would require particularly bold action from the European leadership. Once-taboo topics such as giving the European Central Bank the ability to pursue monetary financing or mutualizing the debt of eurozone members are now openly discussed at the highest levels of European government.

The thinking has also changed within the German leadership, for whom austerity used to be a quasi-religious mantra and fears of inflation bordered on irrational. Now, even some of the most hawkish representatives of the German Central Bank are making cautious overtures regarding an expansionary monetary policy, especially as the European Union, including Germany, veers toward deflation.The Limits of the European Central Bank

Calls for the European Central Bank to replicate the policies of its overseas counterparts have grown louder. These often overlook the fact that unlike the Federal Reserve and the Bank of England, which have guaranteeing employment as a charter goal, the sole mandate of the European Central Bank is to ensure price stability, much like the German Central Bank on which it was modeled. Even then, the bank is remarkably constrained. For example, it cannot directly purchase government bonds. These legal constraints can be changed, but only through a difficult political process.

With interest rates at 0.25 percent and data unclear as to the effectiveness of negative interest rates, quantitative easing is becoming increasingly popular, even within the European Central Bank. It is one of the few powerful tools the European leadership has left to kick-start the Continent's moribund economy. It also happens to be the only one that has at least a veneer of legality. Even then, it is hard to conceive of a meaningful program on par with the United States' three rounds of quantitative easing that could be easily contained within the bounds of the European Central Banks's inflation control-only mandate.

Herein lies the root of the problem, which is that all the measures that might reboot the European economy in essence require sacrificing more sovereignty to a central European authority. Even at this hour, when consensus is slowly but surely building on the political side for more drastic action, the European Union's perennial mandate problem is derailing any hope of recovery.

So far, the European leadership (including the courts) has shown itself to be remarkably creative in finding loopholes and drafting tack-on amendments to sidestep some of the most cumbersome EU legislation and get the job done. Unfortunately, there is no easy answer when it comes to nations having to surrender sovereignty, whether economic, political or social, to a group of barely accountable European technocrats.

The debate surrounding the role of the German Federal Constitutional Court comes against this backdrop. The court, a revered institution in Germany, is spearheading the defense of national interests against perceptions of EU overreach into sovereign matters.A Threat From the Constitutional Court

Much like the U.S. Supreme Court, upon which Germany's highest court was partially modeled after World War II, the German Federal Constitutional Court is the final interpreter of constitutional law. Accordingly, it has the last word on the legality of any treaties, agreements or actions undertaken by Germany at the European level.

The court already has challenged German involvement in some of the more creative legal acrobatics undertaken by the European Union. These include the establishment of the EU emergency bond-buying plan known as the Outright Monetary Transactions program. In that case, the German Federal Constitutional Court proceeded with caution and referred the case to the European Court of Justice. But there are strong indications that it could be more aggressive in future cases. A rejection of government moves in a landmark case, such as one involving potential German participation in a strengthened quantitative easing program, could derail the Continent's recovery.

Economic policy is not the only issue on which the court has proven to be a thorn in German Chancellor Angela Merkel's side. German electoral law currently requires a party to win a minimum of 5 percent of the national vote to enter the national parliament, a measure designed to keep small radical parties out of an already relatively fragmented parliament. Berlin used to apply a similar threshold to German parties seeking access to the European Parliament. The German constitutional court recently struck down this requirement, and some politicians fear it could soon do the same for German federal elections. The current surge in popularity of nationalist parties heretofore excluded from the legislature may jeopardize the existence of a strong government in Berlin, the only real decision-making body in a battered Europe.

The court's current course of action poses an existential threat to Merkel's political career and to Germany's economy and stability, which continue to depend on the health of the European Union and the economies of its constituent members. Should the court so rule, Germany could rapidly lose its place as the Continent's strongman, being condemned instead to internal paralysis as it watches Europe slowly stagnate.

As with most of the really important developments in Europe, the battle between the court and the German government will be drawn out and will remain out of the public eye for now. Still, the very existence of open discussions about reducing the power of one of the most trusted and impartial institutions in Germany testifies to how seriously the chancellor's office takes the danger of the fallout from the court's potential ruling.

Read more: Berlin Fears a High Court Ruling Could Threaten the European Union | Stratfor

For decades, the 80-year-old sawmill owner voted for moderate politicians who espoused the European ideal of building an economic bloc free from the nationalist forces that drove the continent into two world wars.

But as people in the European Union's 28 member countries vote on a new European Parliament, Mr. Pigoni's focus is a worry that his sawmill business will be ruined by low-cost imports, including from Eastern Europe.

Ms. Le Pen is leading a campaign to abolish the EU. She is getting Mr. Pigoni's vote.

"As someone who saw the war, I can tell you the EU was a great idea," he said. "But now it's become a farce. We're broke and we're offering billions to Ukraine."View Graphics

Like Mr. Pigoni, many Europeans have fallen out of love with mainstream political parties and their technocratic creation, the EU.

The EU, they say, has become a bureaucratic machine that excels at dispensing edicts on how cheese is labeled while ignoring everyday problems such as unemployment and illegal immigration. By some polling estimates, myriad anti-EU groups could nearly double their tally in May 22-25 voting from the last European Parliament election five years ago by taking as much as a quarter of the seats.

Casting the EU as public enemy No. 1, Ms. Le Pen and other nationalists are presenting themselves as credible alternatives to Europe's mainstream, pro-EU leaders, and no longer as mere loudspeakers for protest voters.

"The EU nowadays is like the U.S.S.R.: It can't be improved. We need to let it crumble and build after it a Europe of free and sovereign nations," Ms. Le Pen said in an interview at the National Front headquarters just outside Paris.

Having expanded her National Front's following in France, she is setting out to unite Europe's disparate nationalist parties into an anti-EU caucus at the European Parliament—one that could stall the decadeslong march toward a United States of Europe.

The formation of a potent anti-EU minority would also pose a risk to EU policies some economists consider important to restoring growth. One likely target: an ongoing effort to forge a trans-Atlantic free-trade agreement.

That wouldn't bother Ms. Le Pen. She calls the effort "pure folly."

As the election approached, mainstream politicians were sounding the alarm. "The ideas promoted by the far right aren't the values of France and once were behind Europe's nightmare," said French Prime Minister Manuel Valls, alluding to the world wars. In Italy, President Giorgio Napolitano warned of "populist impulses" that endanger the EU.

With many EU members' economies still limping, the bloc has yet to demonstrate an ability to halt the ravages of the sovereign-debt crisis, making this election a crucial test.

Although the elections are for the European Parliament, they are likely to have effects on national governments in some countries. In Italy, the expected rise of anti-EU movements could endanger the frail coalition supporting the government of Prime Minister Matteo Renzi. In France, fallout may be more limited because President François Hollande reshuffled his government after his Socialist Party suffered a stinging defeat in local elections in March.

For Ms. Le Pen, uniting Europe's unruly protest parties under a single banner is likely to be a daunting task. The parties, ranging from Italy's Northern League to Austria's FPÖ to the Sweden Democrats, are often focused on issues local to their regions and share little beyond a desire to disband the EU. They began as fringe groups, and some still are.

The influence of the coalition Ms. Le Pen envisions will also depend in part on her ability to woo groups that oppose the EU but reject nationalist ideology. Among these is the 5-Star Movement of Italian comedian-turned-politician Beppe Grillo, which includes leftists traditionally opposed to Ms. Le Pen. It is forecast to garner more than 20% of the Italian vote in the parliamentary election.

Mr. Grillo recently wrote on his blog that "Marine Le Pen is a fine-looking, successful lady. I don't hate her. But her political stance is different" from his movement's.

One leading euroskeptic, Nigel Farage of the U.K. Independence Party, has called Ms. Le Pen's National Front anti-Semitic, which she denies.

"Ms. Le Pen is best positioned to pull together the anti-Europeans," said Jean-Dominique Giuliani, head of a Paris think tank called the Robert Schuman Foundation. "But running such a rowdy coalition will be a big challenge."

So far, Ms. Le Pen, who has held a seat in the European Parliament for 10 years, has shown a knack for corralling disparate anti-EU forces. Since taking the reins of the National Front in 2011 from her father, Jean-Marie Le Pen, she has hopscotched the continent—joining singalongs with other nationalists in Stockholm, attending a ball with far-right leaders in Vienna and shuttling to meetings of Dutch firebrand Geert Wilders's Freedom Party.European Parliament Elections 2014

At home, Ms. Le Pen, 45 years old, has built a network of young cadres who are refashioning the movement she inherited into a full-fledged political party.

In March, the National Front won about 10 cities in French municipal elections, a strong showing for a group that until recently had no roots in local administrations. Now, polls predict it will collect 23% of the French vote for the European Parliament, topping Mr. Hollande's Socialists and their UMP conservative opposition.

As the municipal-election results came in, Ms. Le Pen's cellphone buzzed with congratulations from allies such as Franz Obermayr from Austria's FPÖ and Gerolf Annemans from a Flemish nationalist group. Wrote Mr. Annemans: "This is a victory for Europe as much as it's a defeat for the European Union."

Part of the gains, nationalist allies say, stem from Ms. Le Pen's success in projecting a modern image and distancing herself from her father, who used to boast of taking part in France's colonial wars in Indochina and Algeria.

"Marine is of a generation that looks into the future, not into the past," said Andreas Mölzer, an Austrian nationalist who sits close to Ms. Le Pen in the European Parliament. "She likes pop songs more than military marches."

The makeover is sometimes disrupted by inflammatory remarks on religion and immigration by her father. On Tuesday, talking to aides about a population boom in the developing world, Mr. Le Pen said, "The problem could be taken care of in three months by Monseigneur Ebola." Mr. Le Pen said later he wasn't calling for an epidemic; his daughter's chief of staff said his words had been misinterpreted.

Ms. Le Pen's rise is also fueled by the declining popularity of the EU's single currency. Support for it across the euro zone fell to 52% last fall from 60% in 2008, according to a poll the EU Commission ordered.

She has tapped into a vast well of public discontent driven by high unemployment, branding the euro as the culprit for many of Europe's economic problems. That message enables the National Front to connect with some voters who aren't animated by its other issues, such as crime and immigration.

Although the EU has had some success in restoring calm on Europe's sovereign-debt markets, its main prescription of austerity for overindebted countries has left large parts of the continent fighting long-running recessions. Greece is burdened by debt nearly twice the size of its economy, Spain by 25% unemployment and Portugal by budget woes that have forced the layoff of a fifth of the civil service. Protesters from 20 countries clashed with police in Brussels last month, waving banners that said "Stop austerity."

Ms. Le Pen maintains that without the euro there would be no need for austerity. The Bank of France could print money to finance the state.

Ms. Le Pen wants her country to create a Ministry of Sovereignties to regain control over powers ceded to Brussels. Calling the euro zone a "prison," she has said the strong common currency hobbles manufacturers' efforts to sell their goods abroad.

"What has been done in the past can, in fact, be undone," Ms. Le Pen said.

When she took over in 2011 as head of the movement her father founded, Ms. Le Pen quickly set about bonding with other nationalist leaders in Europe, often picking cards from her father's Rolodex.

First she met in Rome with a Northern League leader, Mario Borghezio, and the two flew to Lampedusa. The small Italian island near Tunisia was convulsing under waves of illegal immigrants from the Middle East and Africa.

Ms. Le Pen toured its vast refugee camps and its port strewn with abandoned fishing boats used by the refugees. After a meeting with migrants, she said: "I have a lot of compassion for you. I also have a heart. But Europe doesn't have the capacity to welcome you."

Aides to Ms. Le Pen said the trip was part of a campaign aimed at remodeling the image of the National Front, long associated with the xenophobic figure of her father, to show that its stance against immigration wasn't race-based.

Her softer tone helped her gain followers, but she continued to face accusations she hadn't severed links with Europe's more extreme nationalists.

Ms. Le Pen this month with her father, Jean-Marie Le Pen, former leader of the National Front. Associated Press

In early 2012 Ms. Le Pen appeared in a sleek black dress at the imposing Hofburg Palace in Vienna, a guest of the FPÖ for an annual ball held by student groups that accept only ethnic Germans. The date that year fell on the 67th anniversary of the liberation of Auschwitz, and 5,000 protesters harangued guests as they made their way into the palace under police protection.

"In going dancing in Vienna, Ms. Le Pen accomplished a major faux-pas," said the center-right editorial page of the French weekly Le Point.

Later in 2012, Ms. Le Pen joined nationalists from four countries at a dinner in a Stockholm restaurant decorated with stuffed animal heads. It was punctuated by singing, and in her turn at the mike, Ms. Le Pen sang "Paroles, Paroles," a love-duet hit from the 1970s in which a woman bemoans the emptiness of her partner's promises.

In between those trips abroad to court other nationalists, Ms. Le Pen ran in France's May 2012 presidential election, placing third behind Mr. Hollande and incumbent Nicolas Sarkozy. Her 17.9% showing topped any vote tally her father gained in his earlier runs for president.

This year, Ms. Le Pen has ventured into new territory for the National Front: foreign affairs. On a trip to Moscow last month, she met with the speaker of the Russian parliament's lower house, Sergei Naryshkin, who is among the targets of U.S. and EU sanctions imposed after Russia annexed Crimea. "I'm surprised to see how some inside the European Union have declared a Cold War on Russia," Ms. Le Pen said at a briefing with her host.

In developing her anti-euro platform, Ms. Le Pen has exchanged notes with Matteo Salvini of Italy's Northern League, a politician who brandishes campaign posters with screaming yellow banners that read "Basta €uro"—"enough with the euro."

In Italy, the slogan is luring a new generation of voters toward nationalist and populist parties. Among them is Roberto Brazzale, who heads a 200-year-old cheese-making firm in the Vicenza area bearing his family name.

He is nostalgic for the era when Italy's currency was the lira. Then, countries such as Italy could compensate for an erosion of competitiveness by devaluating their currencies. With the euro, that isn't possible.

"The common market is the best thing that ever happened to us," said Mr. Brazzale—"and the euro is about to make it explode."

Italy made a mistake in joining the euro 15 years ago, said 58% of respondents to a March survey by polling firm Istituto Demopolis.

In the election for the European Parliament, Italian parties campaigning against the EU, including the 5-Star Movement, are expected to win about 37% of the votes, according to a Pollwatch prediction based on surveys conducted by three pollsters. Five years ago, the Northern League was the only party with an anti-EU platform, and drew just 10.2%.

In Villers-Cotterêts, the French town northeast of Paris where Mr. Pigoni has his sawmill, he says nearly all of 30 competing mills that once dotted the region are gone. He complains that local schools buy imported furniture rather than turn to local suppliers.

Reinforcing his decision to vote for Ms. Le Pen on Sunday, he said, was a recent pledge by France's president to rekindle growth with small tax cuts spread through 2020.

"What's the point?" Mr. Pigoni said. "By then, France will have lost all its industries."

LONDON — Voters in Britain sent a forceful message of discontent to established political parties on Friday, as returns from local elections showed an even stronger following than expected for the anti-European Union, anti-immigration United Kingdom Independence Party.

The results had an immediate impact across the political spectrum, hurting the Labour Party as well as the partners in the governing coalition, the Conservatives and the Liberal Democrats. The outcome is likely to increase the pressure on Prime Minister David Cameron to take an even harder line on reducing the powers of the European Union.

The local vote is expected to presage another strong showing for the Independence Party in elections for the European Parliament when those votes are counted late on Sunday. Some opinion polls showed the party with slightly more support than the other parties in the European voting, which took place on Thursday, the same day as the local balloting.

Coming on the heels of a strong showing in France’s local elections for the right-wing National Front party of Marine Le Pen, the returns provide a clear signal of the dissatisfaction of Europeans with their mainstream political parties, as well as with the European Union political establishment after six years of economic doldrums, which is still being felt by many despite hints of recovery.

In Britain, the strong showing for the Independence Party will not only leave Mr. Cameron, a Conservative, further embattled, but will also embolden Labour Party critics who say that their leader, Ed Miliband, has not convinced voters of his leadership capacity.

The Liberal Democrats, known for their strength locally, and their leader, the vocally pro-European Nick Clegg, were hit very hard by their usual voters, who are unhappy with the compromises of a coalition government.

Nigel Farage, the Independence Party’s leader, said it was now “a serious player,” adding, “The UKIP fox is in the Westminster henhouse.” He appeared on British television for interviews dressed in a sober gray suit, but he celebrated with his trademark pint of beer, and said he would run for the British Parliament in the general election next May.

While right-wing parties skeptical of Europe are expected to do well all over the European Union in what is normally a low turnout, the Dutch went against the trend and put its right-wing Party for Freedom, led by Geert Wilders, into fourth place, behind pro-Europe parties, according to an exit poll conducted by Ipsos for Dutch TV.

Mr. Wilders, whose party had been expected to top the Dutch voting, attributed his poor showing to a low turnout of around 35 percent.

Still, despite its sweeping gains in the local British elections, the Independence Party will not control a single local council and does not have a single member in Parliament. Nor does it have a coherent set of economic policies. But Mr. Farage’s message — British values, British beer, controls on immigration from within the European Union and a British exit from the bloc — is clearly resonating with disaffected voters from across the spectrum who are angry about the cost of living, the drop in real income and years of austerity.

A similar message is echoed by other anti-Europe and more far-right parties, including the National Front in France and the Five Star Movement in Italy.

The Independence Party has already proved itself to be an alternative to the status quo, being to the right of the Conservatives but trying to avoid, or repress, the racism of far-right parties like the British National Party. It has touched a nerve with Britons who believe that jobs are being taken away by immigrants from countries like Romania, Bulgaria and Poland who have the right to travel and work freely within the European Union but are willing to work for lower salaries.

The party could deny the established parties an overall majority in the general election a year from now, with Tories especially concerned that the Independence Party will take away enough votes to block their victory in tight election districts.

“UKIP should be extremely pleased with themselves,” said Tim Bale, a professor of politics at Queen Mary University of London. “But they still face this enormous hurdle of the electoral system, which is going to make it very difficult for them to convert even this level of support into parliamentary seats in 2015.”

A YouGov poll published on Friday about voting intentions for the 2015 general election had the Independence Party at 14 percent, with the Conservatives and Labour tied at 34 percent each, and the Liberal Democrats at 9 percent. That could be bad news for Labour, too, which needs to have a larger share now, since polls traditionally narrow closer to Election Day.

Mr. Clegg, who debated Mr. Farage twice and was considered to have been bested, said, “There’s a very strong antipolitics mood around, a restlessness and dissatisfaction with all the main parties.” He said he would not resign as the leader of the Liberal Democrats.

Mr. Cameron said he took away “a clear message” that “people want us to deliver more on issues that frustrate them and frustrate me.” He promised “to work flat out to deliver more on the economy, immigration and welfare.” He also vowed that he would not make any kind of electoral pact with the Independence Party.

In the latest local results, with 154 of 161 councils declared, Labour had gained 292 seats, the Independence Party had gained 155, the Liberal Democrats had lost 284 and the Conservatives had lost 201.

Though Labour, the main opposition party, also made gains, they were not as large as expected, and the Independence Party’s advances, which included some in traditional Labour heartlands in the north, spread alarm through Labour’s ranks, as well as those of the two governing parties.

Despite important gains in London and some other parts of the country, Labour would normally hope to be polling better a year ahead of a general election. Mr. Miliband said he had taken note of the anxieties of those who opted for the Independence Party. “I am determined that over the next year we persuade them that we can change their lives for the better,” he said.

But except in areas of the southeast, the Independence Party’s vote appeared to be spread thinly, which means that it could emerge from 2015 with no parliamentary seats. In the British system, each election district has its own vote, and national percentages of the vote do not matter.

In the past, the party’s share of the vote dropped significantly in general elections. In 2010, it registered about 3 percent, a year after European elections in which it took more than 16 percent.

The rise of the party seemed implausible eight years ago, when Mr. Cameron, newly elected as the Conservative Party leader but not yet in power, described it as “a bunch of fruitcakes, loonies and closet racists.”

In all, 4,216 seats in 161 local councils in England and 462 seats in 11 local councils in Northern Ireland were up for election.

"The gloomy numbers out of the euro zone—whose roughly $13 trillion economy accounts for 17% of the world's gross domestic product—join a litany of similarly sour reports this week from Asia, all pointing to signs of sudden weakness among many major economies." - WSJ link

This columnist, Niles Gardner, has credibility with me. That said, 4 of these points are opinion and open to question. Only one 2. Britain’s nuclear deterrent will have to be moved is a solid fact. But that point stands alone as a huge issue IMHO. Making Britain a weaker nuclear power makes the world a more dangerous place.

What I find odd about the issue is that it is (our family's alleged homeland) Scotland that is too liberal and the rest of the UK that is too conservative for them. The vote is later next week, Sept 18, and the polling is about even.

1. The Special Relationship will be undercut.2. Britain’s nuclear deterrent will have to be moved3. The coalition against Isil will be weakened4. US markets will take a hit5. An independent Scotland will be an insignificant ally to the U.S.

Details on each at the link. Expanding on no. 2: Britain’s nuclear deterrent will have to be movedThe UK’s entire nuclear deterrent is based in Scotland, and all Britain’s nuclear bases and warheads will have to be moved out of the country, a huge headache not only for London, but also for Washington. Any threat to Britain’s status as a nuclear power is a matter of great concern for the United States. The Nato alliance was originally conceived as a nuclear alliance, one that has been underpinned since its founding by the American, British and (at times) French nuclear deterrents. Anything that undermines Britain’s position as an independent nuclear power and weakens Nato is a matter of significant concern to the United States. ---------------------------------

No doubt the anti-nuke movement will prevent much of the arsenal from being re-located, and potentially put out of service, like Obama is doing here.

The idea of Scottish independence has moved from the implausible to the very possible. Whether or not it actually happens, the idea that the union of England and Scotland, which has existed for more than 300 years, could be dissolved has enormous implications in its own right, and significant implications for Europe and even for global stability.

The United Kingdom was the center of gravity of the international system from the end of the Napoleonic Wars until World War II. It crafted an imperial structure that shaped not only the international system but also the internal political order of countries as diverse as the United States and India. The United Kingdom devised and drove the Industrial Revolution. In many ways, this union was a pivot of world history. To realize it might be dissolved is startling and reveals important things about the direction of the world.

Scotland and England are historical enemies. Their sense of competing nationhoods stretches back centuries, and their occupation of the same island has caused them to fight many wars. Historically they have distrusted each other, and each has given the other good reason for the distrust. The national question was intertwined with dynastic struggles and attempts at union imposed either through conquest or dynastic intrigue. The British were deeply concerned that foreign powers, particularly France, would use Scotland as a base for attacking England. The Scots were afraid that the English desire to prevent this would result in the exploitation of Scotland by England, and perhaps the extinction of the Scottish nation.

The Union of 1707 was the result of acts of parliaments on both sides and led to the creation of the Parliament of Great Britain. England's motive was its old geopolitical fears. Scotland was driven more by financial problems it was unable to solve by itself. What was created was a united island, acting as a single nation. From an outsider's perspective, Scotland and England were charming variations on a single national theme -- the British -- and it was not necessary to consider them as two nations. If there was ever a national distinction that one would have expected to be extinguished in other than cultural terms, it was this one. Now we learn that it is intact. We need a deeper intellectual framework for understanding why Scottish nationalism has persisted.

The Principle of National Self-Determination

The French Enlightenment and subsequent revolution had elevated the nation to the moral center of the world. It was a rebellion against the transnational dynasties and fragments of nations that had governed much of Europe. The Enlightenment saw the nation, which it defined in terms of shared language, culture and history, as having an inherent right to self-determination and as the framework for the republican democracies it argued were the morally correct form of government.

After the French Revolution, some nations, such as Germany and Italy, united into nation-states. After World War I, when the Hapsburg, Hohenzollern, Romanov and Ottoman empires all collapsed, a wave of devolution took place in Europe. The empires devolved into their national components. Some were amalgamated into one larger nation, such as Yugoslavia or Czechoslovakia, while others, such as Poland, were single nation-states. Some had republican democracies, others had variations on the theme, and others were dictatorships. A second major wave of devolution occurred in 1992, when the Soviet Union collapsed and its constituent republics became independent nation-states.

The doctrine of the right to national self-determination drove the first wave of revolts against European imperialism in the Western Hemisphere, creating republics in the Americas. The second wave of colonial rising and European withdrawal occurred after World War II. In some cases, nations became self-determining. In other cases, nation-states simply were invented without corresponding to any nation and actually dividing many. In other cases, there were nations, but republican democracy was never instituted except by pretense. A French thinker, Francois de La Rochefoucauld, said, "Hypocrisy is the tribute that vice pays to virtue." Even while betraying its principles, the entire world could not resist the compulsion to embrace the principles of national self-determination through republican democracy. This effectively was codified as the global gold standard of national morality in the charters of the League of Nations and then the United Nations.

The Imperfection of the Nation-State

The incredible power of the nation-state as a moral principle and right could be only imperfectly imposed. No nation was pure. Each had fragments and minorities of other nations. In many cases, they lived with each other. In other cases, the majority tried to expel or even destroy the minority nation. In yet other cases, the minority demanded independence and the right to form its own nation-state. These conflicts were not only internal; they also caused external conflict over the right of a particular nation to exist or over the precise borders separating the nations.

Europe in particular tore itself apart in wars between 1914 and 1945 over issues related to the rights of nation-states, with the idea of the nation-state being taken to its reductio ad absurdum -- by the Germans as a prime example. After the war, a principle emerged in Europe that the borders as they stood, however imperfect, were not to be challenged. The goal was to abolish one of the primary causes of war in Europe.

The doctrine was imperfectly applied. The collapse of the Soviet Union abolished one set of borders, turning internal frontiers into external borders. The Yugoslavian civil war turned into an international war once Yugoslavia ceased to exist, and into civil wars within nation-states such as Bosnia, Serbia and Croatia. At the same time, the borders in the Caucasus were redrawn when newly independent Armenia seized what had been part of Azerbaijan. And in an act that flew in the face of the principle, NATO countries divided Serbia into two parts: an Albanian part called Kosovo and the rest of Serbia.

The point of all this is to understand that the right to national self-determination comes from deep within European principles and that it has been pursued with an intensity and even viciousness that has torn Europe apart and redrawn its borders. One of the reasons that the European Union exists is to formally abolish these wars of national self-determination by attempting to create a framework that both protects and trivializes the nation-state.

Scotland's Case

The possibility of Scottish independence must be understood in this context. Nationalism, the remembrance and love of history and culture, is not a trivial thing. It has driven Europe and even the world for more than two centuries in ever-increasing waves. The upcoming Scottish election, whichever way it goes, demonstrates the enormous power of the desire for national self-determination. If it can corrode the British union, it can corrode anything.

There are those who argue that Scottish independence could lead to economic problems or complicate the management of national defense. These are not trivial questions, but they are not what is at stake here. From an economic point of view, it makes no sense for Scotland to undergo this sort of turmoil. At best, the economic benefits are uncertain. But this is why any theory of human behavior that assumes that the singular purpose of humans is to maximize economic benefits is wrong. Humans have other motivations that are incomprehensible to the economic model but can be empirically demonstrated to be powerful. If this referendum succeeds, it will still show that after more than 300 years, almost half of Scots prefer economic uncertainty to union with a foreign nation.

This is something that must be considered carefully in a continent that is prone to extreme conflicts and still full of borders that do not map to nations as they are understood historically. Catalonia, whose capital is Barcelona, the second-largest and most vibrant city in Spain, has a significant independence movement. The Treaty of Trianon divided Hungary so that some Hungarians live in Romania, while others live in Slovakia. Belgium consists of French and Dutch groups (Walloons and Fleming), and it is not too extreme to say they detest each other. The eastern half of Poland was seized by the Soviet Union and is now part of Ukraine and Belarus. Many Chechens and Dagestanis want to secede from Russia, as do Karelians, who see themselves as Finns. There is a movement in northern Italy to separate its wealthy cities from the rest of Italy. The war between Azerbaijan and Armenia is far from settled. Myriad other examples can be found in Europe alone.

The right to national self-determination is not simply about the nation governing itself but also about the right of the nation to occupy its traditional geography. And since historical memories of geography vary, the possibility of conflict grows. Consider Ireland: After its fight for independence from England and then Britain, the right to Northern Ireland, whose national identity depended on whose memory was viewing it, resulted in bloody warfare for decades.

Scottish independence would transform British history. All of the attempts at minimizing its significance miss the point. It would mean that the British island would be divided into two nation-states, and however warm the feelings now, they were not warm in the past nor can we be sure that they will be warm in the future. England will be vulnerable in ways that it hasn't been for three centuries. And Scotland will have to determine its future. The tough part of national self-determination is the need to make decisions and live with them.

This is not an argument for or against Scottish nationhood. It is simply drawing attention to the enormous power of nationalism in Europe in particular, and in countries colonized by Europeans. Even Scotland remembers what it once was, and many -- perhaps a majority and perhaps a large minority -- long for its return. But the idea that Scotland recalls its past and wants to resurrect it is a stunning testimony less to Scottish history than to the Enlightenment's turning national rights into a moral imperative that cannot be suppressed.

More important, perhaps, is that although Yugoslavia and the Soviet collapse were not seen as precedents for the rest of Europe, Scotland would be seen that way. No one can deny that Britain is an entity of singular importance. If that can melt away, what is certain? At a time when the European Union's economic crisis is intense, challenging European institutions and principles, the dissolution of the British union would legitimize national claims that have been buried for decades.

But then we have to remember that Scotland was buried in Britain for centuries and has resurrected itself. This raises the question of how confident any of us can be that national claims buried for only decades are settled. I have no idea how the Scottish will vote. What strikes me as overwhelmingly important is that the future of Britain is now on the table, and there is a serious possibility that it will cease to be in the way it was. Nationalism has a tendency to move to its logical conclusion, so I put little stock in the moderate assurances of the Scottish nationalists. Nor do I find the arguments against secession based on tax receipts or banks' movements compelling. For centuries, nationalism has trumped economic issues. The model of economic man may be an ideal to some, but it is empirically false. People are interested in economic well-being, but not at the exclusion of all else. In this case, it does not clearly outweigh the right of the Scottish nation to national-self determination.

I think that however the vote goes, unless the nationalists are surprised by an overwhelming defeat, the genie is out of the bottle, and not merely in Britain. The referendum will re-legitimize questions that have caused much strife throughout the European continent for centuries, including the 31-year war of the 20th century that left 80 million dead.

Reprinting or republication of this report on websites is authorized by prominently displaying the following sentence, including the hyperlink to Stratfor, at the beginning or end of the report.

In his latest novel, French writer Michel Houellebecq presents a controversial situation: The year is 2022, and France has become an Islamicized country where universities have to teach the Koran, women have to wear the veil and polygamy is legal. The book, which created a stir in France, went on sale Jan. 7. That day, a group of terrorists killed 12 people at the headquarters of French satirical magazine Charlie Hebdo.

Also on Jan. 7, German Chancellor Angela Merkel met British Prime Minister David Cameron in London. Although the formal reason for the meeting was to discuss the upcoming G-7 summit, the two leaders also discussed Cameron's proposals to limit migration in Europe. Finally, a much less publicized event took place in Germany that day: A group of politicians from the Euroskeptic Alternative for Germany party met with members of Pegida, the anti-Islam protest group that has staged large protests in Dresden and minor protests in other German cities.

The date of these four episodes is only a coincidence, but the issues involved are not. A growing number of Europeans believe that people from other cultures are threatening their national identities and livelihoods. The emergence of Germany's Pegida movement, which opposes the "Islamization" of Germany, the terrorist attack in Paris and the recent attacks against mosques in Sweden put the focus on Muslims. But the Europeans' fear and mistrust of "foreigners" is a much broader phenomenon that goes beyond the issue of Islam-related violence. What is actually happening is that Europe is rediscovering nationalism.The Limits of European Integration

Europe traditionally has been a cradle for nationalism. From the romantic nationalism of the 19th century to the totalitarianism of the 20th century, Europeans have long defined themselves by a strong sentiment of national belonging, often linked to language, ethnicity and religion, and distrust of foreigners. The love for the place you were born, the trust of the people who surround you, and the fear of what strangers could do to you and your community is a basic human feeling. But in Europe, nationalism is particularly notable for the sheer scale of death and destruction it historically has brought to the Continent.

Conscious of the dangers of nationalism, after World War II Europeans sought to weaken the nation-state and progressively replace it with the European Union, a grouping of supranational institutions that, over time, were meant to create a supranational European identity. The idea worked for some time, especially at the economic level, where institutions quickly achieved integration. But over the past few years, several changes in Europe have exposed the limits of the project.

The first is the economic crisis. To a large extent, prosperity was the glue holding the European Union together. During good times, when most people have a job and children are convinced that they will have a better life than their parents, the idea of giving up national sovereignty to supranational institutions is easier to accept. But prosperity is no longer a certainty, and many in Europe are beginning to have second thoughts about the benefits of the European project. The economic decline is also leading to a crisis of representation; a growing number of citizens no longer feel represented by mainstream political parties, unions and other traditional institutions.

The second element is immigration. The economic crisis is affecting the Continent unevenly; countries in northern Europe generally are faring better than those in the south. In addition, the European Union's enlargement in the mid 2000s opened the door for immigration from countries in the former Communist bloc. As a result, countries such as Germany, the United Kingdom and the Netherlands are dealing with immigration from southern and eastern EU countries.

Moreover, Europe's economic crisis coincides with a deepening of the chronic instability in the Middle East and the Levant. This instability has led to a refugee crisis in Europe as hundreds of thousands of asylum seekers arrive in Europe every year, most of whom are Muslims.

In times of economic hardship, people tend to look for simple answers to complex problems, and "foreigners" are usually the easiest target. It is not a coincidence that the Pegida protests emerged in Saxony — one of the German states with the lowest rates of immigration but with some of the highest rates of unemployment. Ethnically and linguistically cohesive areas tend to be less tolerant of people with a different cultural background.

The third issue is integration. Most European governments operate under the idea that immigration could help the European Union mitigate the effects of their shrinking, aging populations. But many countries struggle to fully integrate the newly arrived. Encountering obstacles such as rigid citizenship laws and pervasive cultural barriers, many foreigners find it hard to feel at home in their new countries of residence. In some cases, this situation continues for generations.

Youth unemployment, lack of opportunities and social discrimination were some of the triggers of the French riots of 2005. A decade later, nothing much has changed in France in terms of integration, while the economic crisis has compounded some of the country's structural problems, and Islamist groups such as the Islamic State are successfully using social networks to attract Western European youth.Click to Enlarge

European nationals returning home after receiving training in the Middle East perpetrated many of the recent terrorist attacks in Europe. Since the outbreak of civil war in Syria, more than 550 Islamists reportedly have left Germany to travel to the region. Slightly more than half of them held German citizenship. French media recently reported that some 400 French nationals are fighting in Syria. There is a vicious cycle of young men and women who feel disenfranchised and discriminated against turning to violence — which only fuels anti-immigration and anti-Islam rhetoric.Political Systems Under Duress

Western European governments are under considerable stress. They have to deal with immigration from less-developed EU nations while trying to assimilate the asylum seekers that arrive from the Mediterranean. Simultaneously, they face the emergence of anti-immigration parties (from the National Front in France to the U.K. Independence Party in the United Kingdom) and recurring terrorist attacks by nationals who received training in the Middle East. Many Western European countries have to deal with these problems alongside stagnating economies and pervasively high unemployment. The combination of economic malaise and resistance to immigration is seriously challenging the cohesion of the European Union.Sweden's Electoral Season Reveals Growing Concern with ImmigrationClick to Enlarge

National and regional governments are questioning the Schengen agreement, which eliminates border controls among most EU member states. In recent months, a debate erupted when the government of the German state of Bavaria accused the Italian government of allowing asylum seekers (who, according to EU norms, should have remained in Italy) to leave the country and request asylum somewhere else in the bloc. Rome demanded more solidarity among EU members in the reception of refugees. From Bavaria's point of view, the Schengen agreement should be suspended. From Italy's point of view, the European Union cannot force its coastal nations to bear the sole responsibility of housing the asylum seekers.

The Schengen pact also faces criticism from groups arguing that insufficient internal border controls makes it easier for terrorists to move within the European Union after they enter the bloc. Moreover, some countries have been accused of applying weaker border controls than others. In recent months EU members have discussed ways to improve information sharing across the Continent, but regardless of better cooperation in this area, it is impossible to follow every single potential threat.

Even outside the Schengen agreement, the principle of the free movement of people — one of the founding pillars of the European Union — is under question. Partly because of pressure from the U.K. Independence Party and partly because of its own ideology, the British government flirted with the idea of introducing "emergency brakes" on EU immigration. Germany quickly dismissed the idea, and London eventually abandoned it. But the fact that a moderate government in a core EU country is making these proposals reflects the extent to which the debate over migration in the European Union is no longer at the ideological fringes of the political spectrum.

After decades of post-war supranationalism, the Europeans are once again discussing their national identities. The French tried to start a discussion in 2009, when then-President Nicolas Sarkozy launched a public debate on "what it means to be French" — an exercise that degenerated quickly into a discussion of the role of Muslims in the country. The Pegida protests led to similar debates in Germany, a country that for historic reasons feels extremely uncomfortable with the topic but also considers generational change to be breaking old taboos. Pegida-inspired demonstrations will take place in Austria in February, potentially leading to controversy there as well. These debates will not go away in Europe and will force the Europeans to deal with difficult questions that have remained dormant for decades.

At the core of these problems is growing resistance to globalization, understood as the free movement of goods, services and, most important, people. From the Italian shoemaker who cannot compete with cheap Chinese imports to the British factory worker who believes that Polish immigrants are threatening his job, many Europeans believe globalization is a menace to their way of life. The fact that the European Union was built on many of the principles of globalization explains why the bloc is becoming increasingly fragmented and why the promise of a "United States of Europe" probably will never be achieved.

Note her comments about Putin, especially in light of my recent postings of Glenn Beck's musings on Russia

The Champion of French AnxietyThe National Front leader says ‘we are the only ones to solve the problem’ of the country’s Islamist threat.ENLARGEZina SaundersBySohrab AhmariJan. 16, 2015 6:50 p.m. ET218 COMMENTS

Nanterre, France

Following last week’s terror attacks in Paris on journalists at the satirical newspaper Charlie Hebdo and on a kosher supermarket, many Western leaders have been reluctant to say the motive was at all religious. French President François Hollande said Charlie Hebdo had been targeted by “obscurantism,” whatever that is. And White House spokesman Josh Earnest on Tuesday spent a painful five minutes explaining the Obama administration’s aversion to using the term “radical Islam.”

That’s not a problem for Marine Le Pen, who is never obscure.

“It’s clear Islamic fundamentalism,” says the leader of the National Front, France’s far-right political party that has been gaining in the polls. “Now all the eyes are open,” she adds, referring to a general French awakening to the Islamist threat. And “we are the only ones to solve the problem,” by which she means the National Front.

Once a political outlier, Ms. Le Pen has been gaining prominence as France’s problems—a moribund economy and its un-assimilated Muslim-immigrant population—have become more acute and seemingly beyond cure by the traditional political class. Now, in the aftermath of the home-grown Islamist slaughter in Paris, Ms. Le Pen is betting that she is the French politician most likely to benefit from her countrymen’s shock and disbelief over the threat in their midst.

So it seems a good moment to visit with Ms. Le Pen, whom I met Friday at the National Front’s headquarters in Nanterre, a northwestern suburb of Paris. National Front posters with the slogan “Oui, la France” depict a fierce woman with steely eyes, and that she is: a tall, commanding presence who speaks rapidly in a husky rumble of a voice. But the 46-year-old Ms. Le Pen, alternately smiling or reserved as the moment requires, is also unquestionably charming. There’s a smile covering the steel.

When discussing the terror attacks, or many of France’s other problems, Ms. Le Pen steers the conversation to immigration. “The first problem is that the borders are open, and practically anyone can go freely all around,” she says. “There is no responsible country that would accept such a situation.” It should have been “obvious,” Ms. Le Pen adds, that “massive immigration would just allow the fundamentalists to increase their numbers.”

Seated with three large French flags on the wall nearby, she adds: “There are obvious signs that among the people coming so easily into our country, the hormones of unrest will rise. The French Republic needs to offer to its forces, police, security and army, the proper means to protect our country.”

Yet Ms. Le Pen balks at the prospect of heightening government surveillance to prevent future attacks: “We are totally for individual freedom. The freedom for all is important. In order to catch some, we should not block everybody.”

At the same time she rejects as too weak the tough new counterterror measures announced by Prime Minister Manuel Valls on Friday—including isolation of jihadists in prison, increased staffing at intelligence agencies and granting security services broader power to monitor online communications. “Valls’s speech,” she says, “it was just a speech.” Beyond restricting immigration, her main counterterror proposal is the construction of new prisons and additional funding for the penitentiary administration.

In a country already made wobbly by years of economic anemia—with unemployment hovering intractably above 10%, roughly one in four young people unemployed, and negligible to nonexistent growth—and now quaking after the eruption of Islamist terrorism, Ms. Le Pen’s blunt-force prescriptions have made the National Front more plausible as a political force than it has ever been. Where the party had been an alarming but relatively marginal player under the leadership of her father, the rhetorical bomb-thrower Jean-Marie Le Pen, the more media-savvy Ms. Le Pen has been better at selling the nationalist line since taking over from him in 2011.

Her fixes for France’s troubles are simple: Exit the European Union and end the reign of “globalist” economics—the free movement of goods, capital and labor—that she blames for the fact that France is “dying.” Above all: “Stop immigration,” not just to discourage the potential Islamist threat, but for the overall health of the country. “There are 200,000 legal immigrants coming to France every year,” Ms. Le Pen says. “They just add to the problems.”

Ms. Le Pen doesn’t directly answer my question about what she proposes to do about the millions of Muslim immigrants whose only nationality is French. Instead, she turns her attention to immigrants with dual citizenship. “Do you know that there are 700,000 voters, Algerian and French, who voted in the recent Algerian elections?” she asks. “These people can and should decide one way or the other. We have nothing against being a foreigner in France, but they have to decide.” The message: Choose France or get out. Also: Those with dual citizenship who commit crimes in France should “be sent back.”

It’s tempting to dismiss these views as unrealistic and against the tide of history—the French political and media establishments routinely do. As Ms. Le Pen says: “Many political parties in France and many in the media, the first question they ask about anything is: ‘Will this be advantageous for the National Front?’ ” A notable example was the decision by the organizers of last weekend’s unity march in Paris not to invite Ms. Le Pen and her supporters.

But merely to dismiss or ignore Ms. Le Pen and the National Front doesn’t deter her political project. She represents a real and substantial constituency of people who, as one Paris-based journalist told me, “don’t recognize the French republic they used to know anymore.” These are working-class voters, mostly white, who once answered the old left’s call of class solidarity but who now feel left behind as manufacturers and job-creators flee the country under the press of France’s rigid labor laws, protectionist rules and high taxes.

When France’s postwar economy was still booming, and the welfare state was cash-flush, the country could afford to absorb millions of Muslim immigrants, mainly from France’s former colonies in North Africa. At the time, lawmakers made almost no effort to encourage these newcomers to assimilate. They were relegated to banlieues, public-housing ghettoes on the outskirts of major cities, where the French republican ethos—liberty, equality, fraternity—rarely penetrated.

Ms. Le Pen says it is too late to bring these immigrants into the mainstream: “You can’t assimilate a group,” she says. “The group will impose the laws of the group on the individual. . . . The French nationality, either you earn it, or you deserve it, but it’s not granted automatically.”

She cites Lassana Bathily, the black Muslim employee of the besieged kosher supermarket who helped save Jewish lives during the hostage crisis, as a model. “It’s good that we gave him the French nationality” after his heroism became known. By contrast, the Kouachi brothers, who perpetrated the Charlie Hebdo attack, “already had a police record, and obviously they should not have been given French nationality,” she says.

Nor does Ms. Le Pen favor a grand bargain with French Muslims, an oft-proposed model in which the French state, which is colorblind according to its founding ideals, gives Muslim immigrants a leg up in exchange for a pledge of allegiance from their communal leaders. “Positive discrimination, this is very bad for France,” she says. “This again was imported from the U.S., and it will never work in France. The grand bargain in France is called secularism. The laws had to be respected by all.”

She adds: “Whom do you talk to in France with the Muslim community? The current major Muslim organization in France, which is privileged nowadays, is linked to the Muslim Brotherhood. Meanwhile, General Sisi in Egypt is fighting the Muslim Brotherhood.”

Under her father’s leadership, the National Front developed a reputation as a party of cranks and anti-Semites. Mr. Le Pen caused a storm in 1987 by calling the Holocaust a “detail in the history of World War II.” Last year he said that “Mr. Ebola” could “sort out” the world’s “demographic explosion.”

Ms. Le Pen has tried to distance the party from her father’s legacy, and she has made a few inroads in the French Jewish community. She says she has been ahead of others in sounding the alarm about anti-Semitism. Muslim fundamentalists, she says, “take advantage of the Israeli-Palestinian conflict. The National Front is the best shield to protect France’s Jewish citizens against this threat. We are the only ones to solve this problem.”

The National Front is by no means a traditional right-wing party. On economic matters, the party is closer to the left. Take the Trans-Atlantic Trade and Investment Partnership, or TTIP, the Euro-American free-trade agreement that analysts estimate would boost growth by $100 billion on both sides of the pond. The environmentalist left and labor unions fiercely oppose the TTIP; so does Ms. Le Pen.

“The U.S. way of conducting business doesn’t bring anything to France,” she says. “The hygienic and social methods imposed in the U.S. are not similar to the needs of France and the French. The multinational interests that impose their own ways are not good for France. Practically, all these are just weakening France. I am in defense of economic ways that would help France.”

Ms. Le Pen also has a soft spot for Russian President Vladimir Putin . “Putin did very difficult work,” she says. “He had to face and put together Russia after the Soviet Union. It’s a complicated country. We should not continue anymore to impose our own ideas and our judgment on the situation in Russia. Putin was able to gain Russia respect and place it again on a high level on the international stage.”

American global leadership is anathema among the National Front crowd. “I am for a multi-polar world,” says Ms. Le Pen, “where each country definitely has its own sovereignty. The economic model suggested by Putin, which is a patriotic model, is positive in my eyes. Russians are patriotic, and this is a welcome thing. We can do nothing against Russia. There is a Cold War now against Russia that France is involved in. We should work with Russia.”

Regarding allegations that the National Front has received a €10 billion loan ($11.58 billion) from a Kremlin-tied bank, Ms. Le Pen says: “All is false as usual. We went to French banks, many European banks, but all refused our request. The bank in question is not a Kremlin bank but a private bank. This in no way has an influence on the National Front’s political views and that will never change. If a U.S. bank or a French bank would like to lend us money, we would accept gladly.”

The European Union, which even its supporters concede suffers from a democratic deficit, draws her scorn. “I believe in nations,” she says. “I believe in democracy. I believe in people who are in charge of their own destinies. The European Union concentrates all the worst aspects of hyper-socialist ideas and all the worst aspects of the ultra-liberal ideas. The European Union was made against the people’s wills. It is a failed experiment.”

In last May’s elections to the European Parliament, the National Front thumped both the center-right Union for a Popular Movement and the center-left Socialists. In a September poll, Ms. Le Pen beat President Hollande in a hypothetical face-off. France’s next presidential election is still two years off.

Meanwhile, on Thursday police raided an Islamist cell that spread across Belgium and France. Authorities said jihadists were planning to murder police officers in the streets. Two suspects in Belgium were killed. Fifteen suspects were arrested in the two countries—and France shuddered anew.

For the past two weeks, I have focused on the growing fragmentation of Europe. Two weeks ago, the murders in Paris prompted me to write about the fault line between Europe and the Islamic world. Last week, I wrote about the nationalism that is rising in individual European countries after the European Central Bank was forced to allow national banks to participate in quantitative easing so European nations wouldn't be forced to bear the debt of other nations. I am focusing on fragmentation partly because it is happening before our eyes, partly because Stratfor has been forecasting this for a long time and partly because my new book on the fragmentation of Europe — Flashpoints: The Emerging Crisis in Europe — is being released today.

This is the week to speak of the political and social fragmentation within European nations and its impact on Europe as a whole. The coalition of the Radical Left party, known as Syriza, has scored a major victory in Greece. Now the party is forming a ruling coalition and overwhelming the traditional mainstream parties. It is drawing along other left-wing and right-wing parties that are united only in their resistance to the EU's insistence that austerity is the solution to the ongoing economic crisis that began in 2008.Two Versions of the Same Tale

The story is well known. The financial crisis of 2008, which began as a mortgage default issue in the United States, created a sovereign debt crisis in Europe. Some European countries were unable to make payment on bonds, and this threatened the European banking system. There had to be some sort of state intervention, but there was a fundamental disagreement about what problem had to be solved. Broadly speaking, there were two narratives.

The German version, and the one that became the conventional view in Europe, is that the sovereign debt crisis is the result of irresponsible social policies in Greece, the country with the greatest debt problem. These troublesome policies included early retirement for government workers, excessive unemployment benefits and so on. Politicians had bought votes by squandering resources on social programs the country couldn't afford, did not rigorously collect taxes and failed to promote hard work and industriousness. Therefore, the crisis that was threatening the banking system was rooted in the irresponsibility of the debtors.

Another version, hardly heard in the early days but far more credible today, is that the crisis is the result of Germany's irresponsibility. Germany, the fourth-largest economy in the world, exports the equivalent of about 50 percent of its gross domestic product because German consumers cannot support its oversized industrial output. The result is that Germany survives on an export surge. For Germany, the European Union — with its free-trade zone, the euro and regulations in Brussels — is a means for maintaining exports. The loans German banks made to countries such as Greece after 2009 were designed to maintain demand for its exports. The Germans knew the debts could not be repaid, but they wanted to kick the can down the road and avoid dealing with the fact that their export addiction could not be maintained.

If you accept the German narrative, then the policies that must be followed are the ones that would force Greece to clean up its act. That means continuing to impose austerity on the Greeks. If the Greek narrative is correct, than the problem is with Germany. To end the crisis, Germany would have to curb its appetite for exports and shift Europe's rules on trade, the valuation of the euro and regulation from Brussels while living within its means. This would mean reducing its exports to the free-trade zone that has an industry incapable of competing with Germany's.

The German narrative has been overwhelmingly accepted, and the Greek version has hardly been heard. I describe what happened when austerity was imposed in Flashpoints:

But the impact on Greece of government cuts was far greater than expected. Like many European countries, the Greeks ran many economic activities, including medicine and other essential services, through the state, making physicians and other health care professionals government employees. When cuts were made in public sector pay and employment, it deeply affected the professional and middle classes.

Over the course of several years, unemployment in Greece rose to over 25 percent. This was higher than unemployment in the United States during the Depression. Some said that Greece's black economy was making up the difference and things weren't that bad. That was true to some extent but not nearly as much as people thought, since the black economy was simply an extension of the rest of the economy, and business was bad everywhere. In fact the situation was worse than it appeared to be, since there were many government workers who were still employed but had had their wages cut drastically, many by as much as two-thirds.

The Greek story was repeated in Spain and, to a somewhat lesser extent, in Portugal, southern France and southern Italy. Mediterranean Europe had entered the European Union with the expectation that membership would raise its living standards to the level of northern Europe. The sovereign debt crisis hit them particularly hard because in the free trade zone, this region had found it difficult to develop its economies, as it would have normally. Therefore the first economic crisis devastated them.

Regardless of which version you believe to be true, there is one thing that is certain: Greece was put in an impossible position when it agreed to a debt repayment plan that its economy could not support. These plans plunged it into a depression it still has not recovered from — and the problems have spread to other parts of Europe.Seeds of Discontent

There was a deep belief in the European Union and beyond that the nations adhering to Europe's rules would, in due course, recover. Europe's mainstream political parties supported the European Union and its policies, and they were elected and re-elected. There was a general feeling that economic dysfunction would pass. But it is 2015 now, the situation has not gotten better and there are growing movements in many countries that are opposed to continuing with austerity. The sense that Europe is shifting was visible in the European Central Bank's decision last week to ease austerity by increasing liquidity in the system. In my view, this is too little too late; although quantitative easing might work for a recession, Southern Europe is in a depression. This is not merely a word. It means that the infrastructure of businesses that are able to utilize the money has been smashed, and therefore, quantitative easing's impact on unemployment will be limited. It takes a generation to recover from a depression. Interestingly, the European Central Bank excluded Greece from the quantitative easing program, saying the country is far too exposed to debt to allow the risk of its central bank lending.

Virtually every European country has developed growing movements that oppose the European Union and its policies. Most of these are on the right of the political spectrum. This means that in addition to their economic grievances, they want to regain control of their borders to limit immigration. Opposition movements have also emerged from the left — Podemos in Spain, for instance, and of course, Syriza in Greece. The left has the same grievances as the right, save for the racial overtones. But what is important is this: Greece has been seen as the outlier, but it is in fact the leading edge of the European crisis. It was the first to face default, the first to impose austerity, the first to experience the brutal weight that resulted and now it is the first to elect a government that pledges to end austerity. Left or right, these parties are threatening Europe's traditional parties, which the middle and lower class see as being complicit with Germany in creating the austerity regime.

Syriza has moderated its position on the European Union, as parties are wont to moderate during an election. But its position is that it will negotiate a new program of Greek debt repayments to its European lenders, one that will relieve the burden on the Greeks. There is reason to believe that it might succeed. The Germans don't care if Greece pulls out of the euro. Germany is, however, terrified that the political movements that are afoot will end or inhibit Europe's free-trade zone. Right-wing parties' goal of limiting the cross-border movement of workers already represents an open demand for an end to the free-trade zone for labor. But Germany, the export addict, needs the free-trade zone badly.

This is one of the points that people miss. They are concerned that countries will withdraw from the euro. As Hungary showed when the forint's decline put its citizens in danger of defaulting on mortgages, a nation-state has the power to protect its citizens from debt if it wishes to do so. The Greeks, inside or outside the eurozone, can also exercise this power. In addition to being unable to repay their debt structurally, they cannot afford to repay it politically. The parties that supported austerity in Greece were crushed. The mainstream parties in other European countries saw what happened in Greece and are aware of the rising force of Euroskepticism in their own countries. The ability of these parties to comply with these burdens is dependent on the voters, and their political base is dissolving. Rational politicians are not dismissing Syriza as an outrider.

The issue then is not the euro. Instead, the first real issue is the effect of structured or unstructured defaults on the European banking system and how the European Central Bank, committed to not making Germany liable for the debts of other countries, will handle that. The second, and more important, issue is now the future of the free-trade zone. Having open borders seemed like a good idea during prosperous times, but the fear of Islamist terrorism and the fear of Italians competing with Bulgarians for scarce jobs make those open borders less and less likely to endure. And if nations can erect walls for people, then why not erect walls for goods to protect their own industries and jobs? In the long run, protectionism hurts the economy, but Europe is dealing with many people who don't have a long run, have fallen from the professional classes and now worry about how they will feed their families.

For Germany, which depends on free access to Europe's markets to help prop up its export-dependent economy, the loss of the euro would be the loss of a tool for managing trade within and outside the eurozone. But the rise of protectionism in Europe would be a calamity. The German economy would stagger without those exports.

From my point of view, the argument about austerity is over. The European Central Bank ended the austerity regime half-heartedly last week, and the Syriza victory sent an earthquake through Europe's political system, although the Eurocratic elite will dismiss it as an outlier. If Europe's defaults — structured or unstructured — surge as a result, the question of the euro becomes an interesting but non-critical issue. What will become the issue, and what is already becoming the issue, is free trade. That is the core of the European concept, and that is the next issue on the agenda as the German narrative loses credibility and the Greek narrative replaces it as the conventional wisdom.

It is not hard to imagine the disaster that would ensue if the United States were to export 50 percent of its GDP, and half of it went to Canada and Mexico. A free-trade zone in which the giant pivot is not a net importer can't work. And that is exactly the situation in Europe. Its pivot is Germany, but rather than serving as the engine of growth by being an importer, it became the world's fourth-largest national economy by exporting half its GDP. That can't possibly be sustainable.Possible Seismic Changes Ahead

There are then three drivers in Europe now. One is the desire to control borders — nominally to control Islamist terrorists but truthfully to limit the movement of all labor, Muslims included. Second, there is the empowerment of the nation-states in Europe by the European Central Bank, which is making its quantitative easing program run through national banks, which may only buy their own nation's debt. Third, there is the political base, which is dissolving under Europe's feet.

The question about Europe now is not whether it can retain its current form, but how radically that form will change. And the most daunting question is whether Europe, unable to maintain its union, will see a return of nationalism and its possible consequences. As I put it in Flashpoints:

The most important question in the world is whether conflict and war have actually been banished or whether this is merely an interlude, a seductive illusion. Europe is the single most prosperous region in the world. Its collective GDP is greater than that of the United States. It touches Asia, the Middle East and Africa. Another series of wars would change not only Europe, but the entire world.

To even speak of war in Europe would have been preposterous a few years ago, and to many, it is preposterous today. But Ukraine is very much a part of Europe, as was Yugoslavia. Europeans' confidence that all this is behind them, the sense of European exceptionalism, may well be correct. But as Europe's institutions disintegrate, it is not too early to ask what comes next. History rarely provides the answer you expect — and certainly not the answer you hope for.

Editor's Note: The newest book by Stratfor chairman and founder George Friedman, Flashpoints: The Emerging Crisis in Europe, is being released today. It is now available.

President Barack Obama has yet to meet with the new head of the North Atlantic Treaty Organization, and won't see Secretary General Jens Stoltenberg this week, even though he is in Washington for three days. Stoltenberg’s office requested a meeting with Obama well in advance of the visit, but never heard anything from the White House, two sources close to the NATO chief told me.

The leaders of almost all the other 28 NATO member countries have made time for Stoltenberg since he took over the world's largest military alliance in October. Stoltenberg, twice the prime minister of Norway, met Monday with Canadian Prime Minister Stephen Harper in Ottawa to discuss the threat of the Islamic State and the crisis in Ukraine, two issues near the top of Obama's agenda.

Kurt Volker, who served as the U.S. permanent representative to NATO under both President George W. Bush and Obama, said the president broke a long tradition. “The Bush administration held a firm line that if the NATO secretary general came to town, he would be seen by the president ... so as not to diminish his stature or authority,” he told me.

America's commitment to defend its NATO allies is its biggest treaty obligation, said Volker, adding that European security is at its most perilous moment since the Cold War. Russia has moved troops and weapons into eastern Ukraine, annexed Crimea, placed nuclear-capable missiles in striking distance of NATO allies, flown strategic-bomber mock runs in the North Atlantic, practiced attack approaches on the U.K. and Sweden, and this week threatened to aim nuclear missiles at Denmark’s warships.

“It is hard for me to believe that the president of the United States has not found the time to meet with the current secretary general of NATO given the magnitude of what this implies, and the responsibilities of his office,” Volker said.

Bernadette Meehan, a spokeswoman for the National Security Council, declined to say why Obama didn’t respond to Stoltenberg’s request. “We don’t have any meetings to announce at this time,” she told me in a statement. Sources told me that Stoltenberg was able to arrange a last-minute meeting with Defense Secretary Ashton Carter.

According to White House press releases, Obama didn’t exactly have a packed schedule. On Tuesday, he held important meetings and a press conference with Afghan President Ashraf Ghani at the White House (Ghani will meet with Stoltenberg while they are both in town). But the only event on Obama’s public schedule for Wednesday is a short speech to kick off a meeting related to the Affordable Care Act. On Thursday, he will head to Alabama to give a speech about the economy.

Stoltenberg is in town primarily for the NATO Transformation Seminar, a once-a-year strategic brainstorming session that brings together NATO’s leadership with experts and top officials from the host country. The event is organized by the Allied Command Transformation in Norfolk, Virginia, and the Atlantic Council.

“The focus of this year’s seminar is to think through how best to update NATO’s strategy given real threats in the east and the south, against the backdrop of a dramatically changing world,” said Damon Wilson, a former NSC senior director for Europe who is now with the Atlantic Council. “The practical focus is to begin developing the road map to the next NATO summit, which will take place in Warsaw in July 2016, a summit which will presumably be the capstone and last summit for the Obama administration.”

Last year, the seminar was hosted in Paris, and then-NATO Secretary General Anders Fogh Rasmussen got a separate bilateral meeting with President Francois Hollande of France.

Last Friday, at the German Marshall Fund Brussels Forum, Stoltenberg talked about the importance of close coordination inside NATO in order to first confront Russian aggression and then eventually move toward a stable relationship with Moscow.

“The only way we can have the confidence to engage with Russia,” he said, “is to have the confidence and the strength which is provided by strong collective defense, the NATO alliance.”

Polish President Bronislaw Komorowski told the Brussels Forum that there has been a worrisome lag between NATO’s promises of more defensive equipment for Poland and what has actually arrived, a blow to the alliance's credibility. “It’s very important and necessary for everyone to have the conviction, including the potential aggressor to have this conviction, that NATO is truly determined to execute contingency plans,” he said.

The White House missed a perfect opportunity to reinforce that message this week in snubbing Stoltenberg. It fits into a narrative pushed by Obama critics that he would rather meet with problematic leaders such as Iraqi Prime Minister Haider al-Abadi, who will get an Oval Office meeting next month, than firm allies. The message Russian President Vladimir Putin will take away is that the White House-NATO relationship is rocky, and he will be right.

Leo Tolstoy's Anna Karenina begins with one of the most famous lines in literature: "Happy families are all alike; every unhappy family is unhappy in its own way." According to this idea, to be happy, a family has to solve a large number of complex and interconnected problems — ranging from the management of money to coping with adultery — and not fail to deal with any of them. This concept gave birth to the "Anna Karenina principle," which dictates that a deficiency in any one of a number of factors dooms an endeavor to failure, or simply; "unhappiness."

The European Union may have chosen the poet Friedrich Schiller's "Ode to Joy," used by Beethoven in his Ninth Symphony, as its anthem, but it has not been a happy family for a long time. The bloc grew in membership and prerogatives in the 1990s and early 2000s because everybody seemed to benefit. As long as member states were growing and unemployment was low, governments and voters supported the process of continental integration. The economic crisis changed things dramatically for Europe, and the union became "unhappy" in various ways.

What is a Geopolitical Diary? George Friedman Explains.

At the moment, the Continent's focus is on Greece, and rightly so. The country's deep economic crisis is a threat to the European project, if not from a financial point of view, at least from a political perspective. A "Grexit" could open the door for other countries to leave the union in a progressive fragmentation that could have unforeseeable consequences.

While most European eyes are on poor and indebted Greece, a proud and wealthy island nation is slowly but steadily moving closer to holding a referendum on EU membership. As Mark Twain might put it, reports of the death of British Conservatives were greatly exaggerated. Contradicting all opinion polls, David Cameron was easily re-elected in May and now feels more confident than ever in his push to renegotiate the European Union's founding treaties. Considering the lack of appetite for treaty change in continental Europe, the British government will soon have to decide whether it wants to campaign for what some people are calling a "Brexit."

In the meantime, more subtle processes are taking place elsewhere in Europe. In Spain, the two-party system that guaranteed political stability for almost four decades is in the process of collapsing. It could be replaced by a multi-party system where protest parties have a larger say in policymaking. In Italy, the ruling center-left government is losing ground to right-wing and anti-establishment forces that, while lacking in unity, represent the dissatisfaction of a nation facing secular economic stagnation. Even in Poland, the only EU member that avoided recession during the crisis, citizens recently punished the establishment by voting for protest and nationalist parties in last month's presidential election. In very different ways, years of economic crisis and political fragmentation are making people question the European project and the perceived elites that back it.

While the European Union is breaking apart at its edges, the core is trying to come up with answers and solutions. The economy ministers of France and Germany wrote a joint article on June 3, calling for institutional reforms to ensure greater economic convergence in Europe. According to the French and German officials, the core of this new phase of integration would be the creation of a common budget for the eurozone.

The idea seems promising on the surface, but it doesn't really address some of the European Union's key questions: Will Germany agree to share its national wealth with economically weaker countries in the south? Will France give up on its ability to collect and spend state revenue (the ultimate expression of national sovereignty)?

The past six months have been quite good for France from a European perspective. In late 2014, the EU Commission granted Paris extra time to meet its budget targets. In early 2015, the European Central Bank introduced a bond-purchasing program that led to a weaker euro — one of France's main demands. The problem for French President Francois Hollande is that France's timid recovery is not being followed by a decrease in unemployment and, even if that were the case, most French voters have already lost confidence in him. In Germany, low unemployment levels and modest economic growth have softened the impact of these unpopular measures, but German conservatives are growing increasingly restless. Chancellor Angela Merkel's own supporters are criticizing her for moving dangerously close to the center — worryingly close to France's plans for the European Union.

Regardless of what happens to Greece this year, the future of the European Union is linked directly to the evolution of the Franco-German alliance. Even if Paris and Berlin manage to keep their differences under control over the next two years, 2017 will be a turning point for the Continent. That is the year France holds presidential elections, and the main contenders could be a right-wing party and a far-right party competing to see which one is more Euroeskeptic. This is especially true if former President Nicolas Sarkozy wins the current power struggle within his party. Germany will also hold general elections in 2017, and if Merkel decides not to run for a fourth time, the rebel forces inside her party could ultimately decide that Germany will no longer make concessions for weaker European countries. Finally, voters in the United Kingdom may choose not to remain in a bloc that London failed to reform to its liking.

For decades, prosperity was the glue holding the European Union together. Now, to a certain extent, fear of the unknown has become the unifying principle in Europe. Greece will probably not leave the eurozone this year. It doesn't matter. The European family is unhappy in enough ways to break the familial bonds apart.

Greece is the land of misinformation. We constantly hear that a Greek default will cause a market panic and be as damaging to financial markets as the default of Lehman Brothers back in 2008. While there is no possible way to know for sure, we believe that a Greek default will look and feel more like the Detroit default. In other words, it may make a great deal of noise, but the European economy will not collapse. In fact, we believe any sell-off in the equity markets is a buying opportunity.We believe this for five reasons:

First, as long as you weren’t in hibernation this past winter, or even during the past 2000 years, Greek financial problems are not new. Economic authors, Reinhardt and Rogoff calculated that since it became independent in 1829, Greece was in default or rescheduling its debt 51% of the time through 2006. This most recent crisis started in 2009, so financial markets have had plenty of time to prepare. In contrast, the Lehman collapse was totally unexpected, mostly due to people believing government would handle it like Bear Stearns.

Second, and some may not know this, Greek GDP (approximately $240 billion in 2013) is roughly equal to the Detroit Metro Area’s GDP ($224 billion in 2013). At the same time, European Union GDP is roughly equal to US GDP. In other words, the impact on the EU and on the world will be minimal. Yes, Greece has more debt than Detroit, but markets are prepared.

Third, Greek debt is a “sunk cost.” For economic growth it is a moot point. The money has already been underutilized, growth has already suffered. The only thing left is for the realization of losses to rearrange balance sheets. Some banks may take losses, but the money does not disappear – it’s already been spent by retirees and the Greek government. The European Central Bank can count it as money creation, which will lead to more inflation over time. The IMF will take a loss, but a smaller IMF would actually be good for the world.

Fourth, the idea that other countries (Spain, Portugal or Italy) will decide they can default, too, is highly questionable. A default would bring added pain to the Greek economy, which is already devastated. No other country will want that. The true “moral hazard” would occur if Greece were bailed out without major budget and pension reform. Then, other countries could use the same strategy to get money and bailouts for themselves.

Finally, think about where many of these arguments are coming from. Keynesians tell us that government spending will increase growth. Then, when that doesn’t work, and an economy is teetering toward collapse, they say if we don’t bail it out the rest of the world is at risk. Heads, government gets bigger; Tails, the private sector gets smaller.

Robert Mundell, who invented the Euro, hoped that it would impose fiscal discipline on European countries. This would happen because they could not devalue their currency and hide problems with inflation. For the record, inflation doesn’t help anyone – it lowers living standards by reducing purchasing power. But, it does get the government off the hook for actually having to cut budgets, payrolls and pensions. The people who are hurt by this tend to get angry at the politicians who do it. Inflation is a more circuitous and hidden tax and lets politicians off the hook.

While the Euro didn’t stop Greece from borrowing its way into bankruptcy; it is finally imposing Mundell’s discipline. If the EU does the right thing, and forces true austerity or allows a default, then the Mundell hypothesis about a single currency will be proven correct. This could be the best thing that ever happened to Europe. Stay tuned.

Europe today is a continent of borders. The second-smallest continent in the world has more than 50 distinct, sovereign nation-states. Many of these are part of the European Union. At the core of the EU project is an effort to reduce the power and significance of these borders without actually abolishing them — in theory, an achievable goal. But history is not kind to theoretical solutions.

Today, Europe faces three converging crises that are ultimately about national borders, what they mean and who controls them. These crises appear distinct: Immigration from the Islamic world, the Greek economic predicament, and the conflict in Ukraine would seem to have little to do with each other. But in fact they all derive, in different ways, from the question of what borders mean.

Europe's borders have been the foundation of both its political morality and its historical catastrophes. The European Enlightenment argued against multinational monarchies and for sovereign nation-states, which were understood to be the territories in which nations existed. Nations came to be defined as groupings of humans who shared a common history, language, set of values and religion — in short, a common culture into which they were born. These groups had the right of national self-determination, the authority to determine their style of government and the people who governed. Above all, these nations lived in a place, and that place had clear boundaries.

The right of national self-determination has created many distinct nations in Europe. And, as nations do, they sometimes distrust and fear one other, which occasionally leads to wars. They also have memories of betrayals and victimizations that stretch back for centuries before the nations became states. Some viewed the borders as unjust, because they placed their compatriots under foreign rule, or as insufficient to national need. The right of self-determination led inevitably to borders, and the question of borders inevitably led to disputes among states. Between 1914 and 1945, Europeans waged a series of wars about national boundaries and about who has the right to live where. This led to one of the greatest slaughters of human history.

The memory of that carnage led to the creation of the European Union. Its founding principle was that this kind of massacre should never happen again. But the union lacked the power to abolish the nation-state — it was too fundamental to the Europeans' sense of identity. And if the nation-state survived, so did the idea of place and borders.

If the nation-state could not be abolished, however, then at least the borders could lose their significance. Thus two principles emerged after World War II: The first, predating the European Union, was that the existing borders of Europe could not be changed. The hope was that by freezing Europe's borders, Europe could abolish war. The second principle, which came with the mature European Union, was that the bloc's internal borders both existed and did not exist. Borders were to define the boundaries of nation-states and preserved the doctrine of national self-determination, but they were not to exist insofar as the movement of goods, of labor and of capital were concerned. This was not absolute — some states were limited in some of these areas — but it was a general principle and goal. This principle is now under attack in three different ways.The Movement of Muslims in Europe

The chaos in the Middle East has generated a flow of refugees toward Europe. This is adding to the problem that European nations have had with prior Muslim migrations that were encouraged by Europeans. As Europe recovered from World War II, it needed additional labor at low cost. Like other advanced industrial countries have done, a number of European states sought migrants, many from the Islamic world, to fill that need. At first, the Europeans thought of the migrants as temporary residents. Over time, the Europeans conceded citizenship but created a doctrine of multiculturalism, which appeared to be a gesture of tolerance and was implicitly by mutual consent, given that some Muslims resisted assimilation. But this doctrine essentially served to exclude Muslims from full participation in the host culture even as they gained legal citizenship. But as I have said, the European idea of the nation was challenged by the notion of integrating different cultures into European societies.

Partly because of a failure to fully integrate migrants and partly because of terrorist attacks, a growing portion of European society began perceiving the Muslims already in Europe as threatening. Some countries had already discussed resurrecting internal European borders to prevent the movement not only of Muslims, but also of other Europeans seeking jobs in difficult economic times. The recent wave of refugees has raised the matter to a new level.

The refugee crisis has forced the Europeans to face a core issue. The humanitarian principles of the European Union demand that refugees be given sanctuary. And yet, another wave of refugees into Europe has threatened to exacerbate existing social and cultural imbalances in some countries; some anticipate the arrival of more Muslims with dread. Moreover, once migrants are allowed to enter Europe by any one country, the rest of the nations are incapable of preventing the refugees' movement.

Who controls Europe's external borders? Does Spain decide who enters Spain, or does the European Union decide? Whoever decides, does the idea of the free movement of labor include the principle of the free movement of refugees? If so, then EU countries have lost the ability to determine who may enter their societies and who may be excluded. For Europe, given its definition of the nation, this question is not an odd, legal one. It goes to the very heart of what a nation is, and whether the nation-state, under the principle of the right of national self-determination, is empowered to both make that decision and enforce it.

This question does not merely concern Muslims. In the 19th and 20th centuries, the Ostjuden — the Jews coming into Western Europe as they fled czarist edicts — raised the same challenge, even though they sought more vigorously to assimilate. But at that point, the notion of borders was unambiguous even if the specific decision on how to integrate the Jews was unclear. In many countries, the status of minorities from neighboring nations was a nagging question, but there were tools for handling it. The Muslim issue is unique in Europe only to the extent that the European Union has made it unique. The bloc has tried to preserve borders while sapping them of significance, and now there is an upsurge of opposition not only to Muslim immigration, but also to the European Union's understanding of borders and free movement.The Greek Crisis

The question of borders is also at the heart of the Greek crisis. We see two issues: one small, the other vast. The small one involves capital controls. The European Union is committed to a single European financial market within which capital flows freely. Greeks, fearing the outcome of the current crisis, have been moving large amounts of money out of Greece into foreign banks. They remember what happened during the Cyprus crisis, when the government, capitulating to German demands in particular, froze and seized money deposited in Cypriot banks. Under EU rules, the transfer of deposits in one country of the bloc, or even outside the bloc, is generally considered legitimate. However, in the case of Cyprus, the free movement of capital across borders was halted. The same could conceivably happen in Greece.

In any event, which is the prior principle: the free movement of capital or the European Union's overarching authority to control that flow? Are Greek citizens personally liable for their government's debt — not merely through austerity policies, but also through controls imposed by the Greek government under European pressure to inhibit the movement of their money? If the answer is the latter, then borders on capital can be created temporarily.

The larger issue is the movement of goods. A significant dimension of this crisis involves free trade. Germany exports more than 50 percent of its gross domestic product. Its prosperity depends on these exports. I have argued that the inability to control the flow of German goods into Southern Europe drove the region into economic decline. Germany's ability to control the flow of American goods into the country in the 1950s helped drive its economic recovery. The European Union permits limits on the movement of some products, particularly agricultural ones, through subsidies and quotas. In theory, free trade is beneficial to all. In practice, one country's short-term gain can vastly outweigh others' long-term gains. The ability to control the flow of goods is a tool that might slow growth but decrease pain.

The essential principle of the European Union is that of free trade, in the sense that the border cannot become a checkpoint to determine what goods may or may not enter a country and under what tariff rule. The theory is superb, save for its failure to address the synchronization of benefits. And it means that the right to self-determination no longer includes the right to control borders.Ukraine and the 'Inviolability' of Borders

Finally, there is the Ukraine issue — which is not really about Ukraine, but about a prior principle of Europe: Borders cannot be allowed to change. The core of this rule is that altering borders leads to instability. This rule governed between 1945 and 1992. Then, the fall of the Soviet Union transformed the internal borders of Europe dramatically, moving the Russian border eastward and northward. The Soviet collapse also created eight newly free nations that were Soviet satellites in Central and Eastern Europe and 15 new independent states — including Russia — from the constituent parts of the Soviet Union. It could be argued that the fall of the Soviet Union did not change the rule on borders, but that claim would be far-fetched. Everything changed. Then came the "velvet divorce" of Slovakia and the Czech Republic, and now there are potential divorces in the United Kingdom, Spain and Belgium.

Perhaps most importantly, the rule broke down in Yugoslavia, where a single entity split into numerous independent nations, and, among other consequences, a war over borders ensued. The conflict concluded with the separation of Kosovo from Serbia and its elevation to the status of an independent nation. Russia has used this last border change to justify redrawing the borders of Georgia and as a precedent supporting its current demand for the autonomy and control of eastern Ukraine. Similarly, the border between Azerbaijan and Armenia shifted dramatically as the result of war. (On a related note, Cyprus, divided between a Turkish-run north and a Greek-run south, was allowed into the European Union in 2004 with its deep border dispute still unsettled.)

Since the end of the Cold War, the principle of the inviolability of borders has been violated repeatedly — through the creation of new borders, through the creation of newly freed nation-states, through peaceful divisions and through violent war. The principle of stable borders held for the most part until 1991 before undergoing a series of radical shifts that sometimes settled the issue and sometimes left it unresolved. The Europeans welcomed most of these border adjustments, and in one case — Kosovo — Europeans themselves engineered the change.

It is in this context that the Ukrainian war must be considered. Europe's contention, supported by America, is that Russia is attempting to change inviolable borders. There are many good arguments to be made against the Russians in Ukraine, which I have laid out in the past. However, the idea that the Russians are doing something unprecedented in trying to redraw Ukraine's borders is difficult to support. Europe's borders have been in flux for some time. That is indeed a matter of concern; historically, unsettled borders in Europe are precursors to war, as we have seen in Yugoslavia, the Caucasus and now Ukraine. But it is difficult to argue that this particular action by Russia is in itself a dramatically unprecedented event in Europe. The principle of national self-determination depends on a clear understanding of a nation and the unchallenged agreement on its boundaries. The Europeans themselves have in multiple ways established the precedent that borders are not unchallengeable.

There are two principles competing. The first is the European Union's desire that borders be utterly permeable without the nation-state losing its right to self-determination. It is difficult to see how a lack of control over borders is compatible with national self-determination. The other principle is that existing borders not be challenged. On the one hand, the union wants to diminish the importance of borders. On the other hand, it wants to make them incontestable.

Neither principle is succeeding. Within Europe, more forces are emerging that want to return control over borders to nation-states. In different ways, the Muslim immigrant crisis and the Greek crisis intersect at the question of who controls the borders. Meanwhile, the inviolability of borders has been a dead letter since the fall of the Soviet Union.

The idea of borders being archaic is meaningful only if the nation-state is archaic. There is no evidence that this is true in Europe. On the contrary, all of the pressures we see culturally and economically point to not only the persistence of the idea of nationality, but also to its dramatic increase in Europe. At the same time, there is no evidence that the challenge to borders is abating. In fact, during the past quarter of a century, the number of shifts and changes, freely or under pressure, has only increased. And each challenge of a national border, such as the one occurring in Ukraine, is a challenge to a nation's reality and sense of self.

The European Union has promised peace and prosperity. The prosperity is beyond tattered now. And peace has been intermittently disrupted — not in the European Union, but around it — since the Maastricht Treaty was signed in 1992 to create a common economic and monetary union. All of this is linked to the question of what a border represents and how seriously we take it. A border means that this is my country and not yours. This idea has been a source of anguish in Europe and elsewhere. Nevertheless, it is a reality embedded in the human condition. Borders matter, and they matter in many different ways. The European crisis, taken as a whole, is rooted in borders. Attempting to abolish them is attractive in theory. But theory faces reality across its own border.

"The EU has a flag no one salutes, an anthem no one sings, a president no one can name, a parliament whose powers subtract from those of national legislatures, a bureaucracy no one admires or controls, and rules of fiscal rectitude that no member is penalized for ignoring." - George Will